SM Entertainment stock rises as battle for agency continues

Industry

Published: 13 Feb. 2023, 18:07

SM Entertainment stock rises as battle for agency continues

HYBE office in Yongsan District, central Seoul, on Feb. 10. [YONHAP]

SM Entertainment is getting a lot of attention from investors.

With two big companies battling for sizable stakes the in the K-pop agency, the stock price of SM Entertainment is going through the roof.

Shares of SM Entertainment rose as much as 3.14 percent Monday and are up 29 percent since Kakao said it will acquire 9.05 percent of the agency last week. Lee Soo-man, SM Entertainment founder, is against the sale and has filed an injunction to stop the transaction.

He argued it is illegal for the board to issue new shares or convertible bonds to a third party to affect the corporate governance amid the management battle.

Lee, who owns 18.50 percent of SM Entertainment, signed a deal to sell 14.8 percent of the company to HYBE.

HYBE has offered to buy another 25 percent of the agency from individual shareholders at 120,000 won ($94) apiece and could end up with 39.8 percent of the agency. SM Entertainment had around 52,000 small shareholders as of September.

HYBE will end up with 43.5 percent of SM Entertainment if Lee exercises a put option.

The tender offers to retail investors stands until March 1.

SM Entertainment’s share price closed at 116,000 won Monday.

If the court accepts the injunction, new shares to be offered to Kakao will be canceled, and HYBE will successfully acquire the stake in SM. If dismissed, Kakao will acquire 9.05 percent as had been announced.

SM Entertainment founder Lee Soo-man speaks at the World Travel & Tourism Council Global Summit in Saudi Arabia in December. [SM ENTERTAINMENT]

Whether the ruling is announced before HYBE’s tender offer ends will be important.

“If the ruling is announced afterwards, HYBE may have already bought the 25 percent shares it plans to buy” from individual shareholders, said Park Seong-guk, an analyst at Kyobo Securities. “This will make it more challenging for Kakao to make up for the additional shares it needs to purchase” to acquire SM Entertainment.

If the injunction is accepted, it will become difficult for Kakao to take control over the company. But if the injunction is dismissed, battle over SM Entertainment is projected to continue.

Kakao may counter offer, proposing a higher price to acquire shares of retail investors.

“Since an offer needs to be higher than the 120,000 won proposed by HYBE, the acquisition cost is projected to grow higher than had been planned,” said Lee Hwan-wook, an analyst at IBK Securities.

The expectation of a higher tender offer could cause retail shareholders to wait until the price increases.

Kakao Entertainment, 73.60 percent owned by Kakao, raised 1.2 trillion won from Saudi Arabia’s Public Investment Fund and Singapore’s GIC last month, according to local media reports.

Another obstacle faced by the acquirer will be possible antitrust issues.

If 15 percent or more of the company is acquired, the acquisition is subject to review of the Fair Trade Commission (FTC) over monopoly concerns.

HYBE’s acquisition of Lee’s 14.8 percent stake is not subject to the FTC review. But if everything goes as the agency had planned and 40 percent is acquired, it will need to file for the review.

“We haven’t yet received the registration for the review,” said Shin Yong-hee, a spokesperson for the FTC's corporate combination team. “This is a big case, so we’re currently monitoring it. But the shareholder structure first needs to be confirmed before we start the review because the market it would affect first needs to be decided.”

The battle is projected to improve SM Entertainment’s corporate governance. Align Partners Capital Management, which owns 1.1 percent of the agency, said Lee gets significant payments from SM Entertainment.

“Regardless of who acquires SM Entertainment, its structure will improve rapidly,” Park added.

Lee has faced pressure from Align Partners Capital Management to improve the corporate governance, saying Lee receives a considerable amount in royalties from SM Entertainment.

BY JIN MIN-JI [jin.minji@joongang.co.kr]