SM Entertainment battle is about big issues and deep pockets

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SM Entertainment battle is about big issues and deep pockets

Published: 19 Feb. 2023, 15:18 Updated: 19 Feb. 2023, 17:21

Lee Soo-man, founder of SM Entertainment, during an economic forum held on Feb. 14 at the Seoul Grand Hyatt Hotel, central Seoul [YONHAP]

The ugly battle for control of SM Entertainment, involving at least three parties, hinges on complex questions of law and corporate governance and is being fought with the deep pockets of some of the biggest names in K-pop and tech.

SM Entertainment co-CEO Lee Sung-su claims that founder Lee Soo-man has interfered in the management of the company and unfairly enriched himself through transfer pricing schemes. He also says that HYBE is seeking to acquire the company against the wishes of stakeholders.

HYBE is trying to turn the tables. The company claims that the management of the talent agency knew about what Lee Soo-man was doing all along and allowed it to happen.

The feud began on Feb. 7 when Kakao signed a deal with SM Entertainment to buy 9.05 percent of the K-pop agency for 217.2 billion won ($167 million). A few days before that, the agency announced its plans to establish a system that prevent Lee Soo-man from interfering in the company.

Lee Soo-man immediately challenged the Kakao-SM deal and filed for an injunction with the court to stop the deal, calling it “illegal.” On Feb. 10, HYBE said it will buy 14.8 percent of Lee Soo-man’s 18.46 percent stake of SM Entertainment.

SM Entertainment’s board objected to the transaction.

SM Entertainment headquarters in Seongsu-dong, eastern Seoul [SM ENTERTAINMENT]

SM Entertainment co-CEO Lee Sung-su, nephew of Lee Soo-man's late wife, posted a YouTube video on Feb. 16 hurling accusations at the founder and at HYBE.

The co-CEO claimed that Lee Soo-man had established private companies to personally enrich himself. These include Like Planning and CT Planning (CTP). He also claimed that the founder inserted himself in the creative process, sometimes bringing singers to tears.

CTP was singled out for special attention.

Like Planning had been taking up to 6 percent of SM Entertainment’s revenue as “production fees,” which sometimes even exceeded the company’s annual operating profit. The contract between the two companies were cut off on Dec. 31.

CTP, a Hong Kong-based company, signed deals directly with overseas distributors and not SM Entertainment, meaning that the amount that CTP has been taking is twice as much as that of Like Planning because CTP takes 6 percent of the revenue before SM Entertainment and overseas distributors divide the income, whereas Like Planning takes 6 percent of the portion that SM Entertainment gets after splitting it with the record distributors.

HYBE followed with a statement in the afternoon, saying that it had not been notified about the existence of CTP and that deals of any form between SM Entertainment and Lee Soo-man will end if they exist.

HYBE headquarters in Yongsan, central Seoul [NEWS1]

SM Entertainment claimed that this could not be done as the agreement are not with SM Entertainment but the overseas distributors. HYBE said that SM Entertainment was complicitous as it knew about the contracts.

“If the deal between SM and CTP is in fact out of our hands, then we wish to ask SM Entertainment where it stands regarding this deal except for exposing it,” HYBE said Friday. “All things that have been disclosed reveal the systematic problem of SM Entertainment’s management structure, which all unfortunately took place within SM.”

“Change can only take place if the efforts to solve problems are made within SM Entertainment,” the statement continued. “But it is not through questioning the largest shareholder that is fixing SM’s problems.”

In a second video statement uploaded Feb. 17, Lee Sung-su reiterated that HYBE is trying to take over the company against the wishes of stakeholders in a hostile acquisition. He also announced that he will not be a nominee for CEO again in the shareholders meeting.

Lee Sung-su, co-CEO of SM Entertainment, released a statement through his YouTube channel on Friday night. [SCREEN CAPTURE]

"HYBE is the savior for Lee Soo-man, not SM," the co-CEO said. “Culture cannot be monopolized, it should not be monopolized. Respect for diversity is always the foundation of a culture industry. We beg you to stop the hostile merger so that Korea's K-pop does not become victim to monopoly."

SM Entertainment announces its results Monday and HYBE on Tuesday, the company CFOs will have to take calls from analysts.

HYBE will keep its tender offer to buy SM Entertainment stock at 120,000 won from individual shareholders until March 1, although the price is not attractive now as the stock has rallied.

SM’s shares fell 1.36 percent on Friday to 130,100.

Kakao has not announced any plans to buy additional shares. But analysts wager that Kakao may open a tender offer on its own with the 900 billion won Kakao Entertainment will be receiving on Feb. 24 from the 1.2-trillion-won investment from foreign investors.

Both HYBE and Kakao’s offers will be finalized on March 6. SM Entertainment’s shareholders meeting schedule has not been set yet.

Lee Soo-man’s request for injunction to block the Kakao-SM deal has not been ruled on by the court.

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