State Champ Radio HYBE
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SEOUL — The bitter battle for control of K-pop’s fabled agency SM Entertainment has spilled out publicly like an episode of HBO’s Succession. K-pop’s largest agency, HYBE — home to boy band BTS — is pitted against the management of SM, which for years was South Korea’s dominant K-pop company. But as SM’s Lee Soo-man sided with HYBE against the company he founded, a corporate shakeup has turned into a battle royale.
SM sought to maintain its independence through a partnership with Kakao, a South Korean internet giant that has acquired several entertainment agencies. In February, Kakao said it would buy a 9.05% stake in SM against the wishes of Lee, SM’s charismatic founder and rock singer-turned-mogul, whose equity in SM allowed him to challenge the purchase in court.
About a week later, Lee — a controversial figure who helped build the K-pop business over the last three decades but has been convicted of embezzlement in the past — privately approached HYBE founder and chairman Bang Si-hyuk, offering to sell about 80% of his SM shares to HYBE, with an option to sell the remaining chunk at a later date, according to a person with direct knowledge of the matter. As a result, HYBE now has a 15.8% stake in SM, making it the company’s largest shareholder.
Since then, the companies have traded almost daily salvos.
After a March 3 provisionary injunction upheld Lee’s court challenge to the Kakao acquisition, Kakao announced it had canceled its investment in SM and launched a tender offer seeking to buy 35% of SM from minority shareholders. HYBE is now appealing to SM shareholders to back its board nominees and vision for the company. SM sees the move as a hostile takeover and is asking shareholders to appoint independent directors. The clock is ticking before a March 31 annual shareholder meeting.
Both HYBE and SM have grand ambitions to expand K-pop and take on the major labels globally. HYBE increased its revenue 125% to 1.78 billion won ($1.41 billion) from 2020 to 2022, largely by acquiring Ithaca Holdings in 2021 for $1.05 billion and giving its founder, Scooter Braun, the reins to its U.S. operations, HYBE America. In February, HYBE America made its first major move, purchasing Atlanta-based hip-hop company Quality Control Music for $300 million.
SM hopes to more than double its 2022 revenue of 850 billion won ($644 million) to 1.8 trillion won ($1.36 billion) by 2025 through a mix of partnerships and acquisitions, which include acquiring a U.S. management company and, by the second half of 2024, launching its first U.S.-based artist. “Our plan is not limited to local activities of Korean artists,” co-CEO Tak Young-jun said in a Feb. 23 video.
The company plans to spend 350 billion won ($266 million) on a music publishing company and 300 billion won ($228 million) to acquire record labels, with two-thirds of that amount ($152 million) targeting U.S. companies “with a solid local network that can support Korean artists’ global expansion and have global production capabilities in genres complementary to SM,” Lee Sung-soo, SM’s chief creative officer and co-CEO, said in the same video.
But minus its powerful founder, SM doesn’t intend to take the world stage with HYBE’s help. It had envisioned Kakao as its preferred partner in a mission — dubbed “SM 3.0” — it has said it will still push forward with in order to expand outside of Korea and build outposts in Japan, Southeast Asia and the Americas.
A HYBE acquisition of a controlling interest in SM could potentially face regulatory scrutiny from South Korea’s Fair Trade Commission since it exceeds 15% of SM’s stock ownership. In 2022, HYBE was behind 26.8% of albums sold in Korea, while SM was behind 19.1%, according to Korea chart company Circle Chart.
As Lee Dominated, SM’s Luster Was Fading
Though few had predicted such a dramatic unraveling, SM was overdue for a transformation. Once the leading K-pop innovator, SM has debuted just one completely new act, Aespa, in the last five years. It continues to operate through a single pipeline with Lee at the helm of artist management and production, while rivals like HYBE and JYP Entertainment have diversified their portfolios, relying on multiple teams that produce more acts with more independence.
SM’s shares have been chronically undervalued, industry observers say, due to an arrangement where the company paid producing fees to a separate entity owned by Lee. SM paid Lee 24 billion won ($18.1 million) in 2021, equivalent to more than a quarter of SM’s operating profit that year. Even in years when SM produced a loss, Lee took home a sizable paycheck.
The board of directors, packed with Lee allies, allowed the practice to continue for years, until Align Partners Capital Management, a private equity firm, led a shareholder revolt last year. Lee, who now holds about 3% of SM shares, appears headed out the door. HYBE and SM say his role will be reduced if not completely phased out.
“It’s hard to put up a resistance in Korean culture,” Lee Changhwan, CEO of Align Partners, says about the difficulty in over-riding a founder and company’s biggest shareholder. “The governance structure has to go through fundamental changes.”
South Korean stocks are often undervalued, analysts say, since some companies can seem to be managed for the benefit of founders and families to the detriment of general shareholders. Still, in the HYBE-SM power struggle, SM shareholders appear to have won either way: The March 7 share price of 149,700 won ($113.84) is up over 116% since SM announced it would terminate Lee’s contract on Oct. 14.
A K-Pop Pioneer With A Criminal Past
The 70-year-old Lee, who founded SM in 1995, has been credited with making K-pop what it is today. Inspired by early MTV music videos and New Kids on the Block, which he watched during his master’s degree studies in California in the 1980s, he paved the way for K-pop to win overseas fans with a signature formula of visually striking performance and dance pop.
Lee crafted BoA, the female singer who SM scouted in 1998 when she was 11 years old, into the first K-pop artist to break through in the Japanese market; she went on to sell millions of singles and albums. Groups from TVXQ and Girls’ Generation to EXO and NCT have followed suit with international stardom. In 2000, SM became the first K-pop agency to list its shares publicly.
Even before PSY and BTS became global household names, Lee was lecturing publicly about K-pop conquering the world — and about a future when non-Korean singers would join the fray and be trained and managed by K-pop production teams.
Lee’s artistic vision and drive didn’t make up for the company’s corporate governance problems, however. Shareholders have in recent years slammed SM for losses from non-music businesses such as a winery and restaurants while Lee was still getting his producer’s fees. Several SM acts have seen members leave acrimoniously over what they called harsh training and “slave contracts,” resulting in government intervention, including shorter contracts for K-pop trainees and stars.
In 2002, Lee made headlines when he fled the country to escape prosecution while facing embezzlement allegations. After a brief stay on Interpol’s wanted list, he surrendered to Korean authorities and was convicted for siphoning off 1.15 billion won ($892,000 at the time) in company funds during a recapitalization round, which he used to buy shares in SM. (He served three years of probation, and in 2007 he received a presidential pardon — and then returned to the company.) SM has also paid fines for tax evasion, most recently in 2021.
In recent weeks, Lee Sung-soo, the co-CEO who is also nephew to founder Lee’s late wife, leveled a series of accusations at his uncle, which range from previously undisclosed tax evasion through a shell company based in Hong Kong to making “arbitrary” changes to SM bands’ musical direction to advance his own business interests.
While the elder Lee has not directly addressed the allegations, HYBE has responded that it was unaware of such an arrangement during the deal’s signing. In a statement to Billboard, HYBE says its SM acquisition was made “following research on the corporate fundamentals, including publicly disclosed information about SM.”
SM Entertainment shareholders have until the end of the month to weigh two competing visions for the South Korean music company’s future before its annual general meeting on March 31 — one from SM and Korean tech company Kakao and another from K-pop rival HYBE.
Despite SM Entertainment’s announcement Monday that it had canceled plans due to a court injunction to issue new shares and give Kakao a 9.05% stake in the company, making it the leading shareholder, SM and Kakao are pushing forward with their strategy to maintain control. On Tuesday (March 7), Kakao launched a tender offer to buy a 35% stake from SM’s minority shareholders by March 26 and, if successful, could soon own nearly 40% of SM and hold significant voting power.
SM — home to such K-pop acts as NCT 127 and Aespa — has nominated a slate of independent directors and laid out a plan for adding 260 billion won ($200 million) of revenue by 2025 by setting up operations in the U.S., Japan and Southeast Asia, and making acquisitions — including a publishing company — in the coming years, according to a company presentation to shareholders. If the roadmap is successful, SM believes it can double its annual sales from an estimated 770 billion won ($690 billion) in 2023 to 1.5 trillion won ($1.14 billion) in 2025.
Much of SM’s road map stems from its battle with founder Lee Soo-man. In late 2022, an activist investor, Align Partners Capital, convinced SM’s board to appoint a new auditor and terminate a contract with Lee’s production company, Like Planning. Now, SM is attempting to remake itself under revamped corporate governance and a more decentralized organization than Lee’s hierarchical control of artist development.
The current inside directors — including Lee’s nephew, Lee Sung-soo — will resign their positions “in order to take responsibility for the problems of the [Lee Soo-man] system,” the company stated. In their place, SM is recommending its own slate of three executives: CFO Jang Chul-Hyuk; Kim Ji-Won, head of marketing center; and Choi Jung-Min, head of global business center.
To ensure an independent board of directors, SM has proposed the chairperson be one of its outside directors, not one of its own executives. Among the company’s picks for outside directors are Kim Kyu-Shik, president of the Korean Governance Forum; Moon Jungbien, a professor at Korea University that specializes in environmental, social and corporate governance matters; and Sung M. Cho, CEO of music analytics company Chartmetric. For part-time directors, SM recommends Lee Changhwan, the CEO of Align Partners, and Jang Yoon-Joong, Kakao’s global strategy officer.
Lee Chang-hwan
Courtesy of Align Partners
HYBE, home to the wildly popular boy band BTS, has different ambitions for SM’s future. HYBE acquired a 14.8% stake in SM from Lee, the SM founder, on Feb. 22, and an additional 1% through a tender offer, according to a March 6 regulatory filing. It has blasted “the bias and irrationality” of the SM management that approved the Kakao partnership.
“HYBE has been considering the acquisition of SM for a long time and gave much thought into how the two companies could work together,” Jung Jinsoo, HYBE’s chief legal officer, wrote in a letter to SM shareholders on Thursday.
In the letter, Jung argues HYBE solved two problems when it acquired Lee’s equity. First, HYBE acquired Lee’s shares in two SM subsidiaries: SM Brand Marketing and Dream Maker Entertainment Limited. That solves what Jung called “leakage in SM’s profits” to Lee. Second, HYBE alleges SM still owes Lee fees for three years even though it terminated the Like Planning contract as of Dec. 31.
Jung says HYBE structured the stock purchase agreement so payments to Lee stop “upon the execution of the agreement.” HYBE also added a clause to terminate any transactions from SM to Lee that HYBE did not know about.
While SM sees Kakao as the partner for its transformation into a larger, more global entity, HYBE calls it an “unfair partnership” that would give Kakao permanent and exclusive rights to distribute SM’s music, protect SM’s equity at the expense of other shareholders and create conflict of interests that favor Kakao’s interests. “We believe that these details demonstrate the bias and irrationality of the current SM management who approved such arrangements,” Jung writes.
Beyond SM’s relationship with Kakao, HYBE is concerned with SM’s roadmap to increase the number of artists on its roster by expanding production in Korea and building overseas outposts. Jung is questioning SM leadership’s understanding of the time and resources required to develop and break successful artists.
“It goes without saying but you cannot generate profit in K-pop just by having a longer artist roster,” Jung writes. “What’s important is to nurture artists who are loved by fans and provide a creative environment.”
HYBE has submitted a competing slate of inside director recommendations featuring a handful of HYBE executives: Jung; Lee Jaesang, president of HYBE America; and Lee Jin Hwa, HYBE’s chief of management and planning.
For outside directors, HYBE has recommended Kang Namkyu, managing partner at GAON Law Group; Hong Sounman, professor of public administration at Yonsei University; and Lim Dae Woong, a representative of the United Nations Environment Program Finance Initiative. HYBE’s recommendation for part-time director is Park Byungmoo, managing partner at buyout firm VIG Partners; and Choi Kyu Dam, a former NCSOFT finance executive, for part-time auditor.
SM portrays the battle with HYBE as a fight for its independence from a large company. A HYBE takeover would put its interests over SM’s artists, SM says, and could force SM to downsize or divest assets to meet regulatory approval. What’s more, HYBE might not receive a warm welcome: 85% of SM employees who voted on the workplace app Blind oppose HYBE’s “hostile takeover” and want to “protect the culture diversity of K-pop and the unique identity of SM,” according to SM’s investor presentation.
Ultimately, the two sides have competing visions for a board of directors that will best serve SM shareholders and lead the company. To SM, HYBE’s recommended directors are either tied to Lee, employed by HYBE or hurt shareholder value in their previous corporate tenures. To HYBE, SM’s proposals could result in a board controlled by Align Partners that lacks the experience to expand SM and reach the company’s lofty targets.
“[I]t is questionable whether the current management has a sufficient understanding on these circumstances,” writes HYBE’s Jung.
Korean tech company Kakao will launch a tender offer to acquire up to 35% of SM Entertainment’s outstanding shares. The move came a day after a court injunction forced Kakao to cancel its plan to acquire a 9.05% stake directly from SM, whose roster includes NCT 127 and Red Velvet; a court injunction scuttled SM’s plan to issue new shares and give Kakao the stake, according to reports by Bloomberg and Reuters.
Kakao and its subsidiary Kakao Entertainment are seeking to become SM’s largest shareholder and partner, to help rebuild the company after SM’s board of directors terminated a production contract with the company’s legendary founder, Lee Soo-man, on Dec. 31. Lee sold most of his SM shares to HYBE, the home of BTS, on Feb. 22 and won a court injunction Friday that prevented SM from issuing new shares to Kakao. As a result, Kakao has been forced to seek shares from existing SM shareholders instead.
HYBE had sought an additional 25% stake in SM through a tender offer but was able to purchase slightly less than 1% of outstanding shares, the company revealed in a regulatory filing Monday (March 6). That increased HYBE’s ownership stake in SM to 15.8%. With Lee’s 3.65% stake, HYBE has voting power of 19.4% of outstanding shares. The next-largest shareholder, Korea’s National Pension Service, owns 6.2% of SM’s shares.
Kakao and HYBE are locked in a battle for control of SM’s board of directors ahead of the company’s annual general meeting on March 31. “Kakao has strong trust in the excellent competitiveness of SM Entertainment’s current management, employees, and artists, and the current management’s efforts to resolve the factors that hinder SM Entertainment’s growth,” the company said in a statement.
HYBE sees itself as the more skilled, experienced company to guide SM’s global ambitions and has criticized its competitor’s “utterly irresponsible contract” with Kakao.
Kakao and its subsidiary Kakao Entertainment, which raised $966 million from the sovereign wealth funds of Saudi Arabia and Singapore in January, will offer 150,000 won ($115.46) per share — a 25% premium over the 120,000 won ($92.36) per share HYBE offered.
SM’s share price rose 13.8% to 148,100 won ($114.09) on Tuesday morning in Seoul following news of Kakao’s tender offer.
Additional reporting by Jeyup S. Kwaak.
TOKYO — A court ruling in South Korea on Friday added further confusion to K-pop’s biggest corporate shakeup in years: the rollercoaster battle for control over SM Entertainment, the once-industry leader bedeviled by corporate governance concerns, which rival HYBE is eager to take control of.
The Seoul Eastern District Court granted a provisionary injunction to block SM from issuing new shares, which Kakao, a Korean tech giant, had agreed to buy as part of a partnership deal between the two companies. The court ruled that SM’s decision was taken without shareholders’ consent, accepting the argument from SM founder Lee Soo Man, who has been battling SM’s management over the future of the company he created in 1995.
The ruling marks a win for HYBE, K-pop’s largest agency and home to boy band BTS, which in recent weeks acquired a 14.8% stake of SM shares from Lee – and announced plans to take control and overhaul SM’s management and board of directors. HYBE was offering shareholders a premium to boost its stake up to 40%, but the market price has since exceeded the offer price. SM’s management has slammed HYBE’s acquisition as a “hostile takeover.”
Following the ruling, HYBE, in a statement, thanked the court for the “appropriate” ruling. “With this result, everything should now fall back into place,” the company said.
In a statement from his lawyers, Lee said the decision “clearly confirmed that the resolution by SM’s current management to issue new shares and convertible bonds was made in an unlawful attempt to influence the company’s control and governance.” The attorneys added that “if SM’s current management further attempts to commit unlawful acts in the future, we will respond firmly by taking appropriate legal actions.”
A Kakao spokesperson said late Friday that the company didn’t immediately have a comment but “plans to issue a response after internal discussions.” A SM spokesperson couldn’t immediately be reached.
Lee and the company he founded are widely considered trailblazers, developing K-pop’s signature formula of visually driven performances and dance pop, and tirelessly knocking on overseas markets’ doors. But in recent years SM’s output has slowed, which its management has blamed on the founder-led single-pipeline structure.
SM’s co-CEO Lee Sung-su, a nephew of the founder’s late wife, has lashed out at the uncle with a litany of accusations, from using artists’ music for personal gains to tax evasion through a Hong Kong-based paper company. Shareholders in recent years have also objected to the founder’s ballooning producer fees, which he was receiving via a separate entity he owned.
Kakao in February agreed with SM’s management to buy 9.05% of SM shares, as part of a wider partnership agreement. The messenger-app-and-search-engine company, which has successfully expanded into e-finance and music, was going to distribute SM’s music and related content on its platforms. Kakao has also acquired several entertainment agencies in recent years, leading some, including HYBE, to argue Kakao was trying to gain managerial control over SM. Both SM executives and Kakao have rejected the claim.
With an annual shareholders meeting scheduled for March 31, SM and HYBE are expected to spend the coming weeks courting SM investors, which includes South Korea’s National Pension Service.
In the latest episode of the battle of K-pop giants, HYBE, the home of BTS, took some swings at SM Entertainment’s business partnership with tech company Kakao, owner of a popular messaging app, Kakao M, and music streaming service Melon.
On Feb. 6, Kakao announced it would purchase a 9.05% stake in SM Entertainment, whose roster includes NCT 127 and Red Velvet. Three days later, HYBE announced it would acquire a 14.8% stake in SM Entertainment by purchasing the majority of shares of the company’s founder and legendary K-pop producer, Lee Soo Man. Following a campaign by an activist investor for SM Entertainment to reduce Lee’s role, the company canceled his producer contract on Dec. 31, 2022.
SM Entertainment called HYBE’s investment “hostile M&A” and said its partnership with Kakao is “the first step” in its long-term transformation plan. HYBE sees SM Entertainment’s relationship with Kakao as one-sided and bad for shareholders.
“The contract between SM and Kakao, which grants acquisition of convertible bonds, undermines shareholder interest,” HYBE said in a statement Friday (Feb. 24). A clause grants Kakao or Kakao Entertainment the ability to “continuously increase its stake in SM” by allocating stocks issued through a paid-in capital increase to a third party, HYBE stated. “This will dilute the value of stocks owned by all shareholders other than Kakao or Kakao Entertainment.”
HYBE further argued the contract would hurt SM Entertainment’s chance of attracting “new strategic investors” and make it easier for Kakao “to seize control of SM’s management rights.”
HYBE also took issue with the Kakao’s role in managing SM Entertainment artists and distributing their music, arguing the contract gives Kakao an “unexpiring, exclusive” right to distribute SM Entertainment’s recorded music and allow Kakao Entertainment to manage SM Entertainment artists in North and South America.
In turn, SM Entertainment subsidiary SM Life Design will produce the recordings of Kakao Entertainment artists and provide a music video shooting set. “Compared with the important business rights that SM is handing over,” HYBE stated, “the return seems unreasonably small.”
After reviewing the contract’s legal issues, HYBE “will take all necessary legal measures, both civil and criminal,” it stated.
SM Entertainment’s revenue in 2022 grew 18.7% to 848.3 billion won ($657 million at the average 2022 exchange rate) in 2022, the Korean music company announced Monday. Gross profits rose 15.4% to 297.5 billion won ($230 million), operating profit fell 3.7% to 93.9 billion won ($73 million) and operating margin dropped from 13.6% to 11.1%.
The K-pop company’s roster includes NCT Dream, NCT 127, Aespa and Red Velvet. NCT Dream had the fourth most album sales of any artist in Korea in 2022 with 4.1 million units. Red Velvet was the No. 9 artist with 2.4 million units, NCT 127 was No. 11 with 2.2 million units and Aespa was No. 13 with 1.8 million units.
In the U.S., NCT Dream reached No. 39 on Billboard’s Artist 100 chart in April 2022, while the group’s album Glitch Mode peaked at No. 50 on the Billboard 200 album chart. NCT 127’s latest album, 2 Baddies, peaked at No. 3 on the Billboard 200 in October.
Although SM Entertainment’s largest source of revenue, recorded music, declined 3.7% in 2022, gains in other parts of the business made up for the loss: Concerts jumped tenfold from a pandemic-led slowdown, licensing climbed 62.2% and appearances jumped 48.1%.
In the fourth quarter, SM Entertainment’s revenue rose 7.7% to 256.4 billion won ($188.6 million at the quarter’s average exchange rate). Operating profit rose 70.3% to 25.2 billion won ($18.5 million) and operating margin improved 9.8% from 6.8% in the prior-year period. Net profit fell 72.7% due in part to the sale of real estate in the fourth quarter of 2021 for 19.7 billion won ($14.5 million). The company also experience 7.5 billion won ($5.5 million) of foreign-currency-related loss in the quarter.
SM Entertainment’s earnings release arrived amidst a brewing controversy over an investment in the company by its largest competitor, HYBE. In a deal finalized on Feb. 22, SM Entertainment founder Lee Soo Man sold a majority of his shares to HYBE in what SM Entertainment CFO Jang Cheol-hkuk called a “hostile takeover” that will “undermin[e] the diversity of the K-pop market.”
SM Entertainment’s vision for the company includes Korean entertainment and tech company Kakao, which announced on Feb. 9 it would acquire a 9.1% stake in SM Entertainment. As SM Entertainment laid out in a presentation released Feb. 22, Kakao’s technological capabilities could help SM Entertainment build a stronger line-up and upgrade online fan platforms. Kakao owns the music streaming service Melon.
In an open letter posted on social media on Tuesday, HYBE CEO Park Jiwon argued that together the companies have an opportunity to reach more fans and “stand shoulder-to-shoulder with the world’s major record labels.” HYBE believes it can help SM Entertainment artists in North America and prizes SM Entertainment’s infrastructure in China and Southeast Asia, regions where HYBE currently does little business.
Korean music company HYBE is more than getting by with its primary artist, BTS, on hiatus and its members pursuing solo projects and preparing for military duty. In 2022, HYBE’s revenue grew 41.6% to 1.78 trillion won ($1.41 billion at the Dec. 31, 2022 exchange rate), the company announced Tuesday (Feb. 21).
Adjusted earnings before interest, taxes, depreciation and amortization rose 23.9% to 328.8 billion won ($260.5 million). Margins were thinner that in previous years, however. Last year’s operating margin (as a percent of revenue) fell to 13.4% from 15.1% in 2021 and 18.3% in 2020. Adjusted EBITDA margin dropped to 18.5% from 21.1% in 2021 and 20.2% in 2020.
HYBE breaks revenue into two main categories: artist direct-involvement and artist indirect-involvement. Direct involvement revenues cover such things as recorded music, touring and management. Recorded music sales improved 47% to 553.9 billion won ($438.9 million) and was the largest single revenue source. Concert revenue jumped 470.1% to 258.2 billion won ($204.6 million) as artists returned to touring after scaling back performances during the pandemic.
BTS may be taking a break but it’s still HYBE’s sales leader in album-loving Korea. Four HYBE artists were in the top 10 of Korea’s year-end album tally: BTS was No. 1 with 5.75 million units, Seventeen was No. 3 with 5.56 million units, Tomorrow X Together was No. 5 with 2.78 million units and ENHYPEN was No. 8 with 2.64 million units. Le Sserafim was the No. 15 artist with 1.29 million units. As a point of comparison, the top album in the U.S. last year, Taylor Swift’s Midnights, sold the equivalent of 1.8 million units.
Artist indirect involvement revenue grew only 9.7% in the calendar year. Merchandising and licensing improved 24.8% to 395.6 billion won ($313.5 million) and fan club revenue grew 47.1% to 67.1 billion won ($53.2 million).
In the fourth quarter, HYBE’s revenue grew 16.9% to 535.3 billion won ($424.2 million) in the fourth quarter of 2022. Recorded music revenue jumped 76.4% to 149.1 billion won ($118.2 million) and was the largest single source of revenue.
BTS’s global success has allowed HYBE to diversify itself and rely less on the K-pop super group. In 2017, Korea accounted for 72% of HYBE’s revenues compared to 14% for Japan and 9% for North America. In 2022, HYBE had grown 19-fold from 2017 and had almost evenly balanced business between its three main markets: Korea (33% of revenue), North America (32%) and Japan (28%). The rest of the world contributed just 7% of HYBE’s 2022 revenue — but that could change if the company’s newest investment works as expected.
HYBE’s recent acquisition of a leading stake in competing K-pop company SM Entertainment is an opportunity to develop in markets where it currently has little presence. CEO Park Jiwon explained during Tuesday’s earnings call that HYBE artists can benefit from SM Entertainment’s strong network and infrastructure in China and Southeast Asia. Likewise, HYBE believes it can help SM Entertainment in the North American market.
HYBE latest acquisition didn’t impact 2022 results but will help expand its presence outside of Korea in 2023. On Feb. 8, HYBE purchased QC Media Holdings, the parent company of Atlanta-based hip-hop label Quality Control Music, the home of Migos and Lil Baby, for $300 million. Quality Control will sit under HYBE America and the leadership of CEO Scooter Braun, whose Ithaca Projects was acquired by HYBE in 2021.
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On Feb. 1, days before the Grammy Awards, Billboard honored HYBE chairman Bang Si-hyuk with the Clive Davis Visionary Award at the annual Power 100 event for creating a company that, as Bang put it in his acceptance speech, “challenges the traditional boundaries of music and entertainment.” Fittingly, just one week later, Bang put the global music industry on notice with two major deals that further solidified HYBE’s status as more than the home of BTS and a budding empire and force in pop culture.
First, HYBE America, the U.S. division led by CEO Scooter Braun, acquired QC Media Holdings, the parent company of Atlanta-based hip-hop label Quality Control Music, home to Migos, Lil Baby, Lil Yachty, City Girls and others. Quality Control gives HYBE a hip-hop presence to complement its core K-pop acts (BTS, TOMORROW X TOGETHER) and HYBE America’s pop- and country-leaning rosters from SB Projects (Justin Bieber, Ariana Grande) and Big Machine Label Group (Tim McGraw, Thomas Rhett), respectively. The deal also further diversifies HYBE beyond K-pop and helps alleviate the loss of BTS while its members pursue solo projects and enter government-mandated military service.
Now the No. 1 K-pop music company by market capitalization ($6.5 billion), HYBE on Thursday (Feb. 9) announced it spent $334 million for a 14.8% stake in K-pop rival SM Entertainment, the company behind NCT 127 and SuperM. In buying the majority of founder Lee Soo-man‘s shares, HYBE became the top shareholder in the third-largest Korean music company. With a market capitalization of $1.85 billion, as of its closing price on Friday (Feb. 10), SM Entertainment ranks only slightly behind JYP Entertainment’s $1.9 billion and is more than double YG Entertainment’s $780 million.
Becoming SM Entertainment’s top shareholder can further HYBE’s leading position in South Korea, an increasingly important music market worth $6 billion in 2021, according to the U.S. Department of Commerce. A 15% stake doesn’t give HYBE control over SM Entertainment, but it creates opportunities to work for mutually beneficial outcomes. One could see SM Entertainment artists taking advantage of HYBE’s Weverse social media platform, for example.
The Quality Control deal was worth $300 million in cash and stock, according to HYBE’s regulatory filing. Valuing the company at a multiple of 12 times earnings before interest, taxes, depreciation and amortization — the midpoint of the 10 to 14 times enterprise value-to-EBITDA multiple typically seen in deals for similar music companies — implies Quality Control has annual EBITDA of roughly $25 million. That should provide a nice boost to HYBE’s bottom line. In 2021, HYBE had adjusted EBITDA of $232 million. Through the first nine months of 2022, HYBE’s adjusted EBITDA was $220 million. That implies Quality Control could provide HYBE with a 7.5% to 10% boost in adjusted EBITDA if it finishes 2022 by merely matching its adjusted EBITDA from the fourth quarter of 2021 — and that’s without considering any cost savings resulting from the merger.
HYBE’s annual EBITDA puts it in a middle ground between the three majors and large independent companies. Universal Music Group’s calendar 2021 EBITDA was $2 billion (1.68 billion euros). Warner Music Group’s EBITDA for the year ended Sept. 30, 2022, was $1.2 billion. Sony Music Entertainment does not report EBITDA but paces well ahead of HYBE. After the majors, however, there’s a large gap. BMG’s 2021 EBITDA was $170 million. Hipgnosis Songs Fund posted EBITDA of $130 million in its year ended March 31, 2022. Reservoir Media’s EBITDA in the year ended March 31, 2022, was $41 million. If HYBE matches its EBITDA from the fourth quarter of 2021, it would exceed $300 million in calendar 2022. Had HYBE owned Quality Control during 2022, its EBITDA would have been in the area of $325 million (assuming $92 million in fourth-quarter 2022 EBITDA).
HYBE’s two moves this week are proof the music industry is more competitive and dynamic than some market share numbers might suggest. While the three major labels dominate the record business, independent companies — some distributed by the majors — are flourishing. HYBE certainly has its connections to the majors: Its music is distributed in the United States and other regions by UMG, it has a joint venture with UMG’s Geffen Records and many of its management clients are signed to major labels. But HYBE is ultimately independent of the majors. Based in South Korea, not London or New York, it’s a nimble outsider with a unique approach to melding music and technology.
Perhaps most important to HYBE’s continued growth — and what sets it apart from much of its competition — is how it’s going about doing it. Whereas catalog (music older than 18 months) has taken a larger share of consumption and the industry’s biggest deals and investments have involved established catalogs from Bob Dylan, Bruce Springsteen, Paul Simon, Sting and others prized as safe investments — billions of dollars are flowing into the music industry to acquire intellectual property that’s often many decades old — HYBE is paving its way through entrepreneurism of a different sort.
Like 300 Entertainment (purchased by Warner Music Group in 2021), Alamo Entertainment (purchased by Sony Music Entertainment in 2022) and LVRN (recently valued at more than $100 million), HYBE builds new artists from scratch, sets trends and influences pop culture — beyond TikTok, at that. Now, as it rapidly builds its empire, Bang, Braun and the rest of the company are starting to show what that looks like at scale.
Recent news — quarterly earnings releases and a major investment — had big impacts on some music companies’ stocks Thursday (Feb. 9).
Warner Music Group shares fell 4.3% to $35.09 and dropped as much as 10.5% during the day following the company’s fiscal first quarter earnings release Thursday. Warner’s revenue fell 7.8% (2.7% at constant currency) to $1.48 billion and net income fell 34% to $124 million. A relatively light release schedule, a slowdown in ad-supported revenue and a shorter quarter — the prior year period had one additional week — contributed to the decline. New CEO Robert Kyncl called it a “tough quarter” and pointed to a slate of releases in the second half of the year by Ed Sheeran, Cardi B and David Guetta.
MSG Entertainment shares ended the day up 11.7% to $59.58 and reached as high as $61.33 during the day, up 15% from the prior day’s closing price. Revenue in the quarter rose 24% to $642.2 million. The proposed spinoff is expected to be completed by the end of March and the MSG Sphere in Las Vegas is slated to open in September. Investors had other reasons to cheer, however, as MSGE announced it implemented a cost reduction program that resulted in layoffs and other non-labor savings.
In Seoul, SM Entertainment shares rose nearly 19% to 117,000 won on Friday (Feb. 10) on news that HYBE acquired a 14.8% stake to become its largest shareholder, though shares dipped to 109,800 won, up 11.5%, by mid-morning. Likewise, HYBE shares climbed as much as 10.2% to 218,500 won ($172.76) before falling to 212,500 won ($168), up 7.2% from the previous closing price.
LiveOne shares gained 2.1% to $0.97 despite climbing as high as $1.09, up 14.7% from Monday’s closing price. The company raised its guidance for full-year adjusted EBITDA from $11 million to $12 million. LiveOne’s revenue for the quarter ended Dec. 31 declined 17% to $27.3 million due to its decision not to produce “capital-intensive tentpole or pay-per-view events” until next fiscal year. That decision, along with reduced annual expenses and overhead, helped LiveOne turn adjusted EBITDA from -$4.8 million to $3 million.
The U.S. markets broadly fell on Thursday. The New York Stock Exchange dropped 0.7% and the Nasdaq fell 1%. The S&P 500 fell 0.9%. Markets in Europe fared better, however. The DAX, an index of 40 blue-chip German stocks, rose 0.7%. The FTSE 100, a measure of 100 stocks on the London Stock Exchange, rose 0.3%.
HYBE, the company behind K-pop groups BTS and TOMORROW X TOGETHER, has acquired a leading stake in competing K-pop company SM Entertainment, home to artists including NCT 127, Super M and Aespa. According to a regulatory filing posted Friday (Feb. 10) in Seoul, HYBE acquired shares in the company worth 422.8 billion won ($334.3 million), making it the company’s largest shareholder.
HYBE purchased 3.5 million shares from SM Entertainment founder Lee Soo-man, SM Entertainment’s largest shareholder. The deal gives HYBE a 14.8% stake in the publicly traded music company, which has a market capitalization worth roughly $1.8 billion. HYBE’s market capitalization is worth roughly $6.5 billion.
Lee, who is currently embroiled in a power struggle with SM Entertainment’s management, had owned roughly 18.5% of SM Entertainment’s outstanding shares, according to the company’s investor relations website. Following the sale to HYBE, he is left with roughly 869,000 shares and a 3.7% stake. Lee has a put option to sell his remaining shares one year after either HYBE’s purchase or the date of the business combination, whichever comes first, according to the filing.
Korean tech company Kakao, the owner of the music streaming service Melon, announced on Tuesday it would acquire a 9.05% stake in SM Entertainment, making it the company’s second-largest shareholder. Lee opposes Kakao’s investment, however. According to a report, Lee intends to called SM Entertainment and Kakao’s plan an “act of illegality against the commercial law and article of association” in which SM Entertainment would issue new stock and convertible bonds.
The investment in SM Entertainment is HYBE’s second major deal in as many days. On Wednesday, HYBE America announced it had purchased QC Media Holdings, the parent company of Atlanta-based hip-hop label Quality Control Music. The $300 million deal adds artists including Migos, Lil Baby, Lil Yachty and City Girls to HYBE’s roster and puts the Quality Control roster under the leadership of HYBE America CEO Scooter Braun.
