SM Entertainment
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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%.
Only four of the 20 stocks in Billboard’s Global Music Index were in positive territory this week: Spotify climbed 4.5% to $127.09, Tencent Music Entertainment rose 4.4% to $7.85, Warner Music Group increased 1.5% to $30.21 and Reservoir Media improved 0.2% to $6.15.
Stock markets were rattled again this week by problems in the banking sector. Following a run at Silicon Valley Bank last week, Signature Bank and First Republic faltered this week. Credit Suisse required the backing of the Swiss National Bank on Wednesday after its biggest shareholder refused to inject money to provide much-needed stability. The Dow Jones Industrial Average fell 0.1% this week after dropping 1.2% on Friday (March 17). The S&P 500 improved 1.4% on the week despite falling 1.1% on Friday.
The Global Music Index declined just 0.4% to 1,188.02 despite most stocks falling into negative territory. Spotify and Warner Music Group are two of the most valuable companies in the index. Other large companies had only small declines: Universal Music Group dropped 1.7% to 21.38 euros, SiriusXM fell 0.8% to $3.64 and Live Nation declined 0.4% to $66.36.
The biggest loser of the week was K-pop company SM Entertainment, which fell 23.5% to 113,000 won after HYBE canceled its bid to take control of the company. Last week, SM Entertainment was the Global Music Index’s biggest gainer, improving 14.4% to 147,800 won, after Kakao announced a tender offer to acquire up to a 35% stake from minority shareholders at 150,000 won per share.
The soft advertising market continued to be a problem for radio companies’ stocks. iHeartMedia dropped 12% to $4.31 and Audacy fell 12.5% to $0.14. Morgan Stanley analysts cut the price target for iHeartMedia to $5 from $8 due to “concerns regarding the long-term growth potential of broadcast radio,” according to a March 16 investor note. Year to date, iHeartMedia is down 29.7%, Cumulus Media is off 35.9% and Audacy has declined 39.1%.
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%.
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.
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.
SM Entertainment, home of such K-pop groups as NCT 127, SuperM and Girls’ Generation, had revenue of 238.1 billion KRW ($165 million at the Sept. 30 exchange rate) from July 1 to Sept. 30 — up 65.4% year-over-year and a 29.1% improvement from the previous quarter, the company announced Monday (Nov. 14).
Operating margin — operating profit as a percentage of revenue — improved to 12.5% in the third quarter of 2022, up from 6.9% in the prior-year period. Net income was 29.2 billion KRW ($20.2 million), up 129.5% year-over-year and 15% higher than the second quarter.
The company’s multi-pronged business, which generates revenue across all facets of its artists’ careers, improved across the board: Recorded music revenues grew 46.6% to 135.1 billion won ($93.6 million). SM Entertainment’s album sales improved from 3.25 million units in the prior-year period to 4.7 million units. It had two standout releases in the quarter: NCT 127’s 2 Baddies peaked at No. 3 on the Billboard 200 albums chart and Aespa’s Girls: The 2nd Mini Album topped Billboard’s Top Album Sales chart.
Concert revenues climbed to 10.9 billion won from virtually nothing a year ago. In the quarter, Revenue from appearances — including television, advertising and events — grew 96.4% to 24.3 billion KRW ($16.8 million). Licensing revenue improved 76.1% to 26.4 billion KRW ($18.3 million).
Revenue at SM Entertainment’s subsidiaries grew 119.5% to 136.9 billion KRW ($94.9 million). These companies include Dream Maker, a Hong Kong-based concert booking agency; SM Culture & Contents, a content production and advertising business; and Keyeast, a Korea-based merchandising and licensing business. According to the release, these subsidiaries benefitted from the reopening of domestic and international touring and increased demand for advertising promotion and business-to-business travel.
Several SM Entertainment artists are on tour in the fourth quarter: NCT 127 has nine dates in Korea, U.S., Thailand and Indonesia; Super Junior has six concerts in Indonesia, Hong Kong and Taiwan; and Ryeowook and NCT Dream have six and five concerts in Japan, respectively.
The company’s fourth-quarter release schedule includes new mini albums by Chen, BoA and Red Velvet and Red Velvet member Seulgi. Red Velvet’s Feel My Rhythm album peaked at No. 20 on the Billboard Global Excl. US chart in April; it also landed on the Indonesia Songs (No. 3), Malaysia Songs (No. 5), Phillippines Songs (No. 15) and Taiwan Songs (No. 16) charts. The group’s The ReVe Festival: Finale EP reached No. 40 on Billboard’s Top Album Sales chart in January 2020.
SM Entertainment’s shares rose 0.5% on Monday to 65,800 KRW. Down just 11.3% in 2022, SM Entertainment’s share price has fared better than Korean music companies HYBE (down 61.2%) and YG Entertainment ( down 26.4%) but lags behind JYP Entertainment (up 12.0%), home of Twice, Stray Kids and iTZY.
SM Entertainment’s shares rose 19% on Sept. 16 after the company announced would prematurely end a contract with a production company owned by the company’s founder and largest shareholder, Lee Soo-man. Its share price, however, has fallen 14% since then.
Universal Music Group, Hipgnosis Songs Fund and other music stocks got a much-needed boost on Tuesday (Oct. 25) following news of Apple Music’s price hike, as investors bet it would trigger a wave of streaming subscription cost increases.
Universal Music Group’s stock closed 11.6% higher, Hipgnosis Songs Fund Ltd ended up 7.8% and Korean music companies SM Entertainment and HYBE finished the trading day 4.8% and 4.4% higher, respectfully, on Tuesday. On Monday, Apple announced that it was raising the standard U.S. and U.K. individual plan price to $10.99 from $9.99.
This 10% price hike — Apple’s first — comes amid high inflation and a darkening economic environment in many global markets. If Apple can raise prices at a time like this, that is a sign the music industry can charge more without turning off consumers, Wall Street analysts said.
“We see this as a further signal of the stickiness of music streaming subscriptions even in a weaker macro environment and believe the major markets will be able to absorb higher prices without leading to meaningfully higher churn,” Lisa Yang, Goldman Sachs’s head of European media & internet technology equity research, wrote in a note to investors on Tuesday.
“We believe that other major DSPs will likely follow suit with similar price increases in the near future, implying further potential upside to our music industry forecasts.”
Competitors Spotify and Amazon Music have already raised prices in some markets. Amazon Music raised the price of its unlimited individual plan for Prime members to $8.99 from $7.99 earlier this year.
Spotify, which will report earnings later Tuesday, raised the cost of its individual plans in the Nordics in 2021, although its standard plan for U.S. subscribers remains at $9.99.
“Despite positive management commentary around churn (with regards to recent price increases on certain plans/regions) as well as management’s views on pricing power over the long term, Spotify has highlighted the broader macro environment as a key consideration in terms of implementing price increases in the near term,” Yang wrote.
Apple’s price increase could also have positive impacts on the majors because companies like UMG and Warner Music Group typically get 65% of music-related revenues from streaming companies with a “high incremental margin,” Goldman estimates.
Music stocks have suffered in 2022 as the major U.S. market indices have fallen around 20% so far this year.
UMG’s share price of 21.10 EUR ($21.01 US) is down nearly 14% year to date, Hipngosis Songs Fund Ltd traded at 91.06 penny sterling ($1.03 US) and is down 28% so far this year. Meanwhile, Warner Music Group’s stock traded at $27.16 US, off almost 37% year to date.