SM Entertainment offers set off ownership drama

Industry

Published: 10 Feb. 2023, 17:34

SM Entertainment offers set off ownership drama

A passerby stops in front of HYBE headquarters on Friday in Yongsan, central Seoul. [YONHAP]

Will NCT be teaming up with BTS or Monsta X? K-pop pioneer SM Entertainment faces an uncertain future.

The agency’s founder Lee Soo-man wants to sell to rival agency HYBE, but SM Entertainment's board is against it. The board wants to team up with Kakao, but Lee is going to court to stop a deal with the tech giant.

HYBE said Friday that it has signed a deal with Lee to acquire a 14.8 percent stake in SM Entertainment for 422.8 billion won ($334 million) to become the largest shareholder of the entertainment agency.

HYBE is home to K-pop bands BTS, Tomorrow X Together, Le Sserafim and NewJeans, while SM Entertainment has signed bands Exo, NCT, Red Velvet and aespa.

HYBE will be buying shares owned by Lee, who will be left with around 3.6 percent of SM Entertainment’s shares after the deal goes through on March 6.

HYBE is also buying another 25 percent of SM Entertainment from individual shareholders at 120,000 won per share to acquire a total stake of 39.8 percent. That price is 22 percent higher than the share's closing price on Thursday of 98,500 won.

The bid was offered Friday and will stand until March 1.

Founder of SM Entertainment Lee Soo-man, left, and HYBE founder Bang Si-hyuk [SM ENTERTAINMENT, HYBE]

“I have always agreed with Lee Soo-man’s vision in the metaverse, a multi-label system and environmentally friendly campaigns,” Bang Si-hyuk, founder and chairman of HYBE, said in a press release. “We aim to bring K-pop even higher in the global market using HYBE’s expertise.”

SM Entertainment immediately opposed the decision in a statement joined by 25 managers at the company, including co-CEOs Lee Sung-su and Tak Young-jun.

“We oppose any hostile M&A from outside forces, including HYBE,” read the statement. “We oppose the ownership of the company by any single shareholder or force, and we will try our best to establish a sound and transparent management structure and protect the shareholders’ rights to the fullest.”

Although a 40-percent stake would not give HYBE direct controlling rights, it would give HYBE a large say in the company’s direction as the major shareholder.

The second-largest shareholder following HYBE would be Kakao, which signed a deal to buy 9.05 percent of SM Entertainment, on Tuesday.

The Kakao deal was immediately challenged by founder Lee, who argued that the deal is illegal and filed an injunction to the court on Wednesday to stop it.

Boy band NCT 127 [SM ENTERTAINMENT]

Girl group aespa performing at ABC Good Morning America summer concert series in Central Park in New York, July 8, 2022. [REUTERS/YONHAP]

Insiders say that HYBE had always been eager to buy SM Entertainment to secure its No. 1 spot in the K-pop race, but Lee ignored the option of selling the first major K-pop company to a latecoming competitor until the recent Kakao-SM deal.

Prior to Kakao’s investment, SM Entertainment announced last week that it will establish its first multi-label system to remove its dependence on Lee as the chief music producer of SM’s music. SM Entertainment had also cut ties with Lee’s private company Like Planning, that had been collecting up to 6 percent of SM’s annual revenue as “production fees.”

Lee was set to take 6 percent of the revenue made from music as royalty until 2092 even after the contract ended on Dec. 31, 2022, according to Align Partners Capital Management, a 1.1-percent owner of SM Entertainment that sparked SM’s latest reshuffle.

Lee forfeited that royalty as a part of the deal with HYBE “as a symbol of SM Entertainment’s passion for restructuring,” according to HYBE.

Kakao did not reveal whether it plans to buy more stakes of SM Entertainment. The tech company only revealed that it will use both companies’ intellectual properties and technical expertise and talk more details in the future, in a conference call held Friday.

Much of the future of SM Entertainment will be decided when the company holds its general shareholders meeting next month. The terms of current board members will expire in March and the company will appoint three additional outside directors like it promised last month.

Shares of SM Entertainment jumped 16.6 percent to close at 114,800 won on Friday, while shares of Kakao and HYBE fell, each by 4.9 percent and 0.5 percent to close at 67,400 won and 197,800 won.

BY YOON SO-YEON [yoon.soyeon@joongang.co.kr]