State Champ Radio Kakao
12/29/2023
The year saw K-pop companies making mega moves on a global scale, while the catalog market remained hot.
12/29/2023
In a stunning wrinkle in the fevered battle between Kakao Corp. and HYBE for a controlling stake in K-pop company SM Entertainment, Kakao’s chief investment officer was indicted Monday (Nov. 13) for allegedly manipulating the stock price to ward off HYBE’s rival bid.
Bae Jae-hyun, Kakao’s chief investment officer, will face a trial for violating South Korea’s Capital Markets Act, according to reports. He allegedly inflated the price of SM Entertainment shares by purchasing 240 billion won ($181.3 million) of shares while HYBE, home of K-pop group BTS, was attempting to buy a large stake in the company. Prosecutors also charged Kakao using a provision in the law that allows both a company and its employees to be punished.
The scheme to manipulate SM Entertainment’s share price stemmed from a heated competition between Kakao and HYBE to become the largest shareholder in SM Entertainment — home to such K-pop acts as NCT Dream and Red Velvet — to help rebuild the company after it terminated a production contract with its founder, Lee Soo-man. In February, HYBE acquired a 14.8% stake in the K-pop giant from Lee and attempted to acquire an additional 25% stake through a tender offer at 120,000 won ($92.36) per share. HYBE’s bid was too low, however, and the tender offer gave HYBE less than 1% of outstanding shares.
Bae allegedly acquired SM Entertainment shares to drive up the price above HYBE’s tender offer price, thus thwarting its efforts to obtain a larger stake. On March 6, Kakeo and Kakao Entertainment followed with a tender offer of 150,000 won ($115.46) per share — 25% above HYBE’s tender offer price — and ended up acquiring an additional 25% stake, bringing its ownership of SM Entertainment to 40%. HYBE abandoned its bid to control SM Entertainment on March 13 and announced on March 28 that it would sell nearly half of its stake in SM Entertainment to Kakao for 248.8 billion won ($191.8 million).
Kakao is a South Korean tech conglomerate that owns the country’s dominant chap app, KakaoTalk, and a popular taxi-hailing app, Kakao Mobility, among other products. A subsidiary, Kakao Entertainment, owns Starship Entertainment, home to such K-pop groups as Monsta X, as well as South Korea streaming app Melon. In August, Kakao Entertainment and SM Entertainment revealed their plans to create a North American joint venture by the end of 2023.
The investigation into stock manipulation started soon after Kakao and Kakao Entertainment beat out HYBE for the SM Entertainment stake. South Korean officials raided the offices of Kakao and Kakao Entertainment on April 6 and SM Entertainment’s headquarters on April 18. Bae was arrested for suspected stock manipulation on Oct. 19 before being indicted on Monday. Other executives were suspected of working with Bae to inflate SM Entertainment’s share price, according to a Reuters article at the time of his arrest, but to date no one else has been charged.
Shares of K-pop companies sank this week following news that a member of K-pop ground EXO is leaving SM Entertainment for a different agency. According to reports, D.O. will leave SM Entertainment for a new agency being established by his longtime manager. D.O.’s contract expires in early November, SM Entertainment said in a statement, and the artist “will continue with his EXO activities with SM” but pursue acting and other activities through the new agency.
SM Entertainment shares fell 9% to 113,400 won ($83.93). Shares of YG Entertainment, home of girl group BLACKPINK, dropped 9.3% to 53,700 won ($39.74). Shares of JYP Entertainment, home of Stray Kids and Twice, plummeted 11.1% to 100,900 won ($74.67). HYBE, home to BTS and Tomorrow X Together, fell 8.2% to 224,500 won ($166.15). Shares of Kakao Corp. dropped 9.6% to 39,050 won ($28.90). Kakao and its subsidiary Kakao Entertainment own 40% of SM Entertainment’s common stock. Earlier this year, Kakao Entertainment formed a North American joint venture with SM Entertainment.
With all K-pop stocks moving in synch, investors appear to be concerned that the established agencies could be threatened by upstarts. Because Korean companies have far smaller rosters than publicly traded Western music companies such as Universal Music Group, Warner Music Group and Believe, any one departure can have an outsized impact. When BTS announced it planned to go on hiatus, HYBE’s share price dropped nearly 25% the following day.
Separately, the chief investment officer of Kakao, Bae Jae-hyun, was charged with manipulating SM Entertainment’s stock price in connection with Kakao’s bidding war against HYBE over SM Entertainment in the first quarter of the year. According to Bloomberg, the executive was arrested Thursday for buying 240 billion won ($178 million) worth of SM Entertainment shares in an effort to disrupt HYBE’s tender offer.
Despite the week’s heavy losses, K-pop stocks are among the best performing music stocks in 2023. Through Friday, HYBE, SM Entertainment, YG Entertainment and JYP Entertainment have gained an average of 37.1% year to date. JYP Entertainment leads the four companies with a year-to-date improvement of 48.8%.
The 21-stock Billboard Global Music Index fell 3.1% to 1,313.44, lowering its year-to-date gain to 12.5%. It was the biggest one-week drop for the index since July and just the seventh time this year the index dropped by more than 3% in a week. Losses were widespread and only four of the 21 stocks posted gains.
Stocks generally had a miserable week. In the United States, the Nasdaq composite index fell 3.2% and the S&P 500 declined 2.4%. In the United Kingdom, the FTSE 100 dropped 2.6%. South Korea’s KOSPI composite index sank 3.3%. As the first wave of companies released third-quarter earnings this week, one of the standouts was Netflix. The streaming video giant gained 16.1% on Thursday after announcing it added 9 million subscribers in the quarter and will raise prices in the U.S., U.K. and France.
Anghami was the index’s greatest gainer for the second straight week after increasing 16.6% to $0.96. Last week, shares of the Abu Dhabi-based music streamer jumped 18% after the company received a written notification from the Nasdaq Stock Market on Oct. 12 regarding its closing share price falling below $1.00 for the previous 30 days. On Tuesday, Anghami issued a press release to reveal the Nasdaq Stock Market issued a written notification notifying the company it is not in compliance with the exchange’s requirement that listed companies maintain a minimum market value of $15 million. Anghami fell below the $15 million threshold from Aug. 29 to Oct. 10. Anghami has until April 8, 2024, to regain compliance.
Hipgnosis Songs Fund gained 4.9% to 0.775 GBP ($0.94) this week despite dropping 9.3% on Monday following news the company canceled a planned dividend payment. As the week progressed, the London Stock Exchange-listed company’s stock price steadily increased and was helped by the board of director’s announcement on Thursday of a strategic review to help calm investors’ nerves. After Monday’s decline, the share price rose 15.6% through Friday (Oct. 20) to reach its highest closing price since Oct. 3. At the company’s annual meeting on Oct. 26, shareholders will vote to approve a $440 million catalog sale intended to reduce the share price’s discount to Hipgnosis Songs Fund’s net asset value. Shareholders will also vote on a continuation resolution.
South Korean companies SM Entertainment and Kakao Entertainment have launched what they are calling a “local integrated corporation” in North American as part of previously hinted-at efforts to accelerate their joint stateside operations and build upon the successes of their K-pop artists in the world’s largest music market. The companies said on Tuesday (Aug. 1) […]
HYBE announced Monday (Sept. 17) that a dozen solo artists and music groups on the SM Entertainment roster will join its global fan community platform, Weverse, in September. Those artists, who have not yet been named, will move to Weverse from SM’s own fan community platform, Kwangya Club.
In addition to connecting with fans via services including Weverse Live, the 12 SM artists will also be featured on the e-commerce platform Weverse Shop, where fans can buy albums and official merchandise.
The Weverse deal derives from a platform partnership struck between HYBE, SM and Kakao Entertainment in March after HYBE fell short of its mission to purchase a controlling stake in SM. HYBE, home to K-pop superstars BTS, was blocked in its efforts by rival bidder Kakao, a South Korean tech company that owns Monsta X‘s label Starship Entertainment and Korean music streaming platform Melon. The battle ended when HYBE agreed to sell its entire SM stake to Kakao; days later, it sold 1.66 million SM shares to Kakao for 248.8 billion won ($191.8 million), amounting to 44% of its total shares in the company and increasing the stake of Kakao Corp. and its subsidiary, Kakao Entertainment, to nearly 40%. HYBE retains an 8.8% stake in SM.
Later in March, SM appointed Jang Cheol-hyuk as the company’s new CEO, succeeding outgoing CEO Lee Sung-soo, and named a new board as the company vowed to improve corporate governance and its production system, which had fallen behind rivals like HYBE in recent years and led to investor scrutiny.
Weverse claims approximately 65 million subscribers across 245 countries and regions globally.
Kakao Corp. and its subsidiary, Kakao Entertainment, increased their share of K-pop company SM Entertainment to 39.9% from 4.9% after purchasing 1.66 million shares from HYBE. That left HYBE with 54% of its shares in SM Entertainment, according to a Tuesday (March 28) regulatory filing.
HYBE sold its 1.66 million SM shares for 248.8 billion won ($191.8 million), or 150,000 won ($115.62) per share, leaving it with an 8.8% stake in SM Entertainment. HYBE had planned to sell its entire stake, the company said in a Friday filing, but it did not offload all of its shares during Kakao’s tender offer. Now that the battle for control of SM is over, HYBE’s remaining stake in SM is worth less than its purchase price. With Kakao’s tender having expired on Sunday and SM shareholders no longer able to sell at a premium, SM’s share price dropped 15% to 91,100 ($70.23) won on Monday and improved slightly to 94,300 won ($72.70) on Tuesday.
SM Entertainment, home to such K-pop acts as NCT-127 and Red Velvet, is partnering with Kakao Corp. and Kakao Entertainment to expand globally as it reorganizes following a split with its founder, Lee Soo-man. Kakao Entertainment owns K-pop group Monsta X’s label, Starship Entertainment, as well as the Korean music streaming platform Melon.
HYBE acquired about 3.5 million SM shares from Lee at 120,000 won per share, according to a Feb. 10 regulatory filing. After flirting with a campaign to take board seats and some operational control in SM, HYBE changed course and conceded to Kakao on March 13. “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 at the time. The company had hoped to acquire an additional 25% stake in SM at 120,000 won ($92.51) per share, but its tender offer fizzled and increased its stake from 14.8% to just 15.8%.
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.
HYBE’s plan to control competing K-pop company SM Entertainment and thwart a partnership with tech company Kakao took another step forward on Monday when Kakao, responding to a court injunction, announced it had canceled its stock purchase agreement to acquire a 9.05% stake in SM Entertainment.
Last week, the Seoul Eastern District Court granted a provisionary injunction against SM’s plan to issue new shares and convertible bonds. The judge ruled that SM had made its decision without shareholders’ consent. It was a remarkable win for SM’s controversial founder, Lee Soo-man, and for HYBE, the reigning K-pop company and home to boyband BTS.
For weeks, SM’s management has been trying to wrest control of the company from Lee, who has been found guilty of embezzlement and exercised iron-fisted control over the company he founded in 1995. After SM made a deal with Kakao, Lee turned to HYBE, which became SM’s largest shareholder on Feb. 22 after it acquired a 14.8% stake from Lee, whose production contract with SM was canceled as of Dec. 31.
On Monday, HYBE sent a letter to SM demanding that “the current [SM] Board of Directors should fulfill its duty of care and duty of loyalty towards SM and actively exercise the right to terminate the business cooperation agreement, which contains clauses that are disadvantageous to SM and advantageous to Kakao,” according to a statement that described the letter.
With the injunction in place, HYBE also called for SM to exercise its right to withdraw the recommendation of the director candidate nominated by Kakao. SM had put forward Jang Yoon-Joong, Kakao’s global strategy officer, as a part-time director.
SM and HYBE are pushing competing visions for SM’s future before shareholders vote on a new board of directors at SM’s annual general meeting on March 31. SM wants to partner with Kakao – owner of the Melon music streaming service and KakaoTalk messaging service – to better monetize its intellectual property and launch a joint venture in the U.S.
Called “SM 3.0,” the road map calls for SM to break from the single-producer system maintained by Lee until his removal. Instead, SM wants to develop artists through multiple labels and production centers in Korea, Japan, Southeast and the U.S.
HYBE calls an SM-Kakao tie-up 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. “We believe that these details demonstrate the bias and irrationality of the current SM management who approved such arrangements,” Jung Jinsoo, HYBE’s chief legal officer, wrote in a letter to SM shareholders on Thursday (March 2).
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.
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