HYBE
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South Korea’s HYBE said Friday (March 24) it will sell its stake in SM Entertainment, officially ending a bidding war between HYBE and the South Korean tech company Kakao for control of the K-pop agency that was key to the genre’s popularity and overseas expansion in recent years.
HYBE, home of superstar boy band BTS, said in a filing it will sell its roughly 15% stake in SM for nearly 564 billion won ($435 million) to Kakao, which earlier this month announced a tender offer aimed at acquiring up to 35% of SM Entertainment’s outstanding shares.
Kakao Entertainment owns Monsta X‘s K-pop record label, Starship Entertainment, as well as the South Korean music streaming app Melon, the North America-based webtoon company Tapas Entertainment and several media production companies. It’s a subsidiary of the tech conglomerate Kakao Corp.
HYBE acquired most of its shares in SM in February from SM founder Lee Soo-man, who was recently ousted from the company after shareholders called for changes in SM’s structure. For over a decade, Lee exercised top-down control of the company he started in 1995, and shareholders had raised questions over millions of dollars he received in producer fees annually.
Lee sold his shares to HYBE in retaliation for a move by SM to issue stock to Kakao, ultimately prompting HYBE’s attempt to secure a majority stake in SM through a tender offer. HYBE relented in mid-March because, it said, outbidding Kakao could have “a negative impact on our shareholders.”
Just days after canceling the company’s bid for control of SM, HYBE founder/chairman Bang Si-hyuk reiterated his desire to expand beyond Korea in an effort to eventually compete with the three major labels – Universal Music Group, Sony Music Entertainment and Warner Music Group — on a global scale, stating the company must have a “sense of urgency” in doing so.
Bang additionally signaled a desire for outside support for K-pop companies in their attempts to rival the majors, including possibly from the South Korean government, which has helped elevate Korean companies in other industries into global players. HYBE has already made strides on that front with two U.S. acquisitions — Scooter Braun’s Ithaca Holdings and QC Media Holdings, parent company of hip-hop label Quality Control Music, which Bang said are “just the beginning” in its bid for worldwide domination.
SM and HYBE have in recent years dominated South Korean and global pop charts. Together they accounted for nearly half of all albums sold in South Korea in 2022, according to Korean chart company Circle Chart.
HYBE’s planned stock sale could net the company $87 million, the equivalent of a 25% return on its purchases of Lee’s shares one month ago, Reuters reported earlier on Friday.
HYBE founder and chairman Bang Si-hyuk said his company is only getting started in its bid to grow into a global music powerhouse that can rival the three major labels.
The South Korean company’s two U.S. acquisitions — Scooter Braun’s Ithaca Holdings and QC Media Holdings, parent company of hip-hop label Quality Control Music — are “just the beginning,” Bang said Wednesday at Gwanhun Forum in Seoul. The executive behind supergroup BTS insisted HYBE must have a “sense of urgency” and look outside of Korea to continue to grow.
“We are living in an era where everything we do in the content industry resonates beyond geographical boundaries,” Bang said. “At the same time, K-pop has become a global industry that can only continue to grow by targeting both domestic and international markets.”
At home, Bang said HYBE and its Korean rivals can’t do it alone. In his speech, he called on the South Korean government to support the K-pop companies in their bid to take on the global majors – Universal Music Group, Sony Music Entertainment and Warner Music Group — by helping them become national champions in the way that electronics companies Samsung and LG have become global powerhouses with government support.
While K-pop built HYBE into a powerhouse, the company might have only a brief window to capitalize on its global success. “K-pop is in crisis,” the HYBE chief said, asserting that by most measures the genre is in decline in Southeast Asia, other than growth in China and spending per consumer. In the United States, 53% fewer K-pop tracks charted on the Billboard Hot 100 in 2022 than the previous year, according to Bang. He attributed the K-pop slowdown to BTS’ hiatus as a group in 2022 and said he doesn’t believe the group’s eventual comeback will bring back the lost revenue.
When Bang talks about exporting K-pop around the world, he isn’t referring to just a genre of music. To him, K-pop is “a culture that encompasses music-oriented systems such as music and content production, distribution, marketing, communication with fans, and other systems of music.” In HYBE’s “multi-label” structure, he added, the Korean headquarters provides guidance to its labels and disperses the risk so its subsidiaries can operate “in a healthy competition that drives each other to improve.”
For HYBE to make inroads in the United States, the world’s largest music market, it needs “a strong network and infrastructure … to minimize the cost of trial and error” involved in exploring an unfamiliar landscape, Bang added. In the U.S., Braun leads HYBE America, the umbrella organization for SB Projects’ management clients, Big Machine Music Group and Quality Control. HYBE also has a joint venture in the U.S. with Universal’s Geffen Records to develop a girl pop group for the domestic market.
While Bang didn’t say which companies HYBE is targeting for further acquisitions, in a press conference after his speech he noted HYBE’s interest in Latin labels. The company certainly has the resources to buy additional record labels, artist management firms or tech platforms to further fuel its expansion: HYBE had cash and cash equivalents of 903 billion won ($689 million) as of Sept. 30, 2022, the latest date for which data is available. The goal, said Bang, is to achieve scale “that can’t be ignored.”
Even though HYBE dominates K-pop and generated revenue of $1.4 billion in 2022, Bang described his company in biblical terms: He is David, the three major labels are Goliath. Major K-pop companies account for less than 2% of the global music market, he said, while the majors own 67.4%.
Looking around the world, Bang sees “alarming trends,” including K-pop commanding fewer chart positions in 2022 than in the previous year. “In this context, the existence of global K-pop artists without a dominant global entertainment company inevitably leads to concerns about the industry’s ability to be on the lookout for future uncertainties,” he said.
What will it take for HYBE to turn from David into a sustainable Goliath? Bang wants more scale and stronger distribution partners to give K-pop additional bargaining power to negotiate more favorable distribution rates. In that way, he said, HYBE can improve its financial performance “and enable the company and our artists to grow.”
Further entering the U.S. market will require building “a strong network and infrastructure,” Bang said. “Through this, we need to minimize the cost of trial and error caused by situations that are difficult for us to change, or due to our unfamiliarity with the local conditions, and secure an equal level of presence and influence in the mainstream market equivalent to local companies.”
Breaking artists isn’t a matter of “luck or sheer intuition,” the HYBE founder added. Rather, success is the result of a management process that can be systemized and replicated in other markets. HYBE’s multi-label structure demonstrates this approach, Bang said: “It is a system that has been meticulously established based on experience, trial and error, and contemplation to enable the company’s success.”
Additional reporting by Jeyup S. Kwaak
SEOUL — K-pop juggernaut HYBE has withdrawn its bid to control rival agency SM Entertainment and has instead decided to collaborate with SM as well as rival bidder Kakao, marking a sudden détente. Announced early Sunday, the resolution paves the way for K-pop agencies to not only bury the hatchet but also continue their push to monetize fandom with idol-related online content.
“Proceeding with a higher tender offer [to beat Kakao’s bid] may have in turn caused a negative impact on our shareholders and we also judged it may have further overheated the market,” HYBE said in a statement. The agency of boy band BTS had secured about 15% of SM, a former market leader, mostly by acquiring shares from SM founder Lee Soo-man, who was recently pushed out from the agency. A previous tender offer to increase HYBE’s stake in SM didn’t move the needle and a counteroffer by Kakao remains outstanding until March 26.
On Monday, the market reacted by dragging SM stock down more than 23% to 113,000 Korean won, making Kakao’s current offer at 150,000 won more attractive. A HYBE representative said Monday it has not decided whether to sell the SM shares. He added that it was studying possible avenues for collaboration with SM and/or Kakao but declined to comment further. HYBE and Kakao shares have jumped 3.21% and 4.65%, respectively.
SM, which has played a key role in K-pop’s popularity and overseas expansion, has resisted HYBE’s acquisition, slamming it as “anticompetitive.” The two agencies in recent years have dominated the charts, together accounting for nearly half of all albums sold in 2022, according to Korean chart company Circle Chart. But despite its success, shareholders have been calling for changes to the Lee-controlled single-pipeline structure, as rival agencies grew larger by delegating creative direction to mostly autonomous teams. Lee was also being paid millions of dollars a year in producer fees, though he held no managerial position there, an arrangement that shareholders have scrutinized in recent years.
In a drive for reform, SM’s management in February said it would issue new shares to be sold to Kakao as part of a wide-ranging partnership. Lee, then-the biggest shareholder, protested but management overrode him. Lee then offloaded most of his shares to HYBE, which in turn tried to up its stake with a tender offer. Lee successfully challenged the Kakao deal in court, prompting the latter to issue a higher counteroffer.
“Kakao vows to guarantee operational independence at SM, respecting its strongest asset and impetus, the employees, artists and fans,” said Kakao chief investment officer Bae Jae-hyun in a statement on Sunday. Bae added that Kakao and SM would “create new synergies, based on SM Entertainment’s global IP and production system as well as Kakao’s IT expertise and IP value-chain business capacity.”
HYBE, SM and other rivals have in recent years pushed proprietary platforms like Weverse and Beyond Live to foster online fan communities for all fan activities, free or for-pay. Kakao’s platform and search-engine rival Naver in 2017 also inked a deal with YG Entertainment, home to girl group Blackpink, to push YG artists’ content.
SM did not return calls for comment.
The battle for control of K-pop company SM Entertainment has been a boon for its shareholders. SM’s stock rose 14.4% this week to 147,800 won ($111.95) after Kakao launched a tender offer to seek a 35% stake at 150,000 won ($113.62) per share. Korea’s largest music company, HYBE, previously sought to acquire up to 40% of SM shares at 120,000 won ($90.89) per share. Its tender offer largely failed, however, with HYBE’s stake increasing just 1% — from 14.8% to 15.8% — as investors held out for a better offer.
SM was one of just three stocks in the 20-company Billboard Global Music Index to be in positive territory this week. Abu Dhabi-based music streamer Anghami rose 5.5% and German concert promoter CTS Event rose 1.5%. The overall Global Music Index declined 3.9% to 1,192.56.
Shares of Spotify declined 1.7% to $121.67 this week after it unveiled a slew of new product features at its annual StreamOn event on Wednesday. The company announced it has already surpassed the 500 million monthly active user target for the first quarter with an entire month remaining.
In the U.S., the Dow index fell 1.1% and the S&P 500 declined 1.5%. The big news in the financial markets on Friday (March 10) was the closure of Silicon Valley Bank, the country’s 18th largest bank with assets of nearly $213 billion, according to the Federal Financial Institutions Examination Council; it was a major player amongst the region’s tech companies and venture capital firms. It’s the second-biggest bank failure in U.S. history behind Washington Mutual at the height of the 2007-08 financial crisis. The Federal Deposit Insurance Corporation was appointed SVB’s receiver on Friday and will give insured depositors access to their funds no later than Monday.
The U.K.’s FTSE 100 Index declined 1.7%, Japan’s Nikkei 225 index declined 1.7% and Korea’s KOSPI index declined 1.0%.
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.