White knights and poison pills as K-pop smackdown gets dirty

Industry

Published: 23 Feb. 2023, 18:44 Updated: 23 Feb. 2023, 19:34

White knights and poison pills as K-pop smackdown gets dirty

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

SM Entertainment is buying back shares to manipulate its stock price and prevent a takeover by HYBE, HYBE claims, adding that the maneuver is illegal.

The repurchase of shares comes as SM Entertainment hands over distribution rights for the works of most of its artists to Kakao Entertainment, a company that's playing white knight to stop a determined HYBE.

With 3 billion won ($2.3 million) of cash, SM Entertainment bought 25,000 shares of its own stock at 122,522 won per share, and it may spend another 3.8 billion won to purchase 31,194 shares, according to Korea Investor's Network for Disclosure System.

HYBE is currently the largest shareholder of SM Entertainment, with the 14.8 percent of the company it bought from founder Lee Soo-man for 422.8 billion won as of Wednesday. Lee still has 3.65 percent of SM Entertainment.

A total 40 percent stake is sought by HYBE, with the additional shares being purchased in the open market via a tender offer at 120,000 won per share. The offer will be valid until March 1.

When SM Entertainment shares are trading above the tender price — which was the case as of Thursday — the tender becomes increasingly unattractive to individual shareholders.

Kakao is set to buy 9.05 percent of SM Entertainment via stock and convertible bonds for 217.2 billion won, with the deal closing March 6. Lee challenged the deal as illegal and filed for an injunction from a court. The first hearing was held on Wednesday, and more information was requested from both sides.

No date was set for the ruling.

HYBE called out the purchase of stock by SM Entertainment as illegal in a statement on Thursday.

“Although the stock price is set above 120,000 won, SM’s act to use a large chunk of the company’s capital to purchase its own stock cannot be seen as an innocent intention to ‘support its stock price and act in the interest of the shareholders',” said HYBE. “It cannot avoid the suspicion that it is SM’s attempt to manipulate the stock price and to disrupt HYBE’s attempt in its process of tender offer.”

HYBE pointed out that SM’s board and management who agreed to the recent purchases could face legal responsibility under Article 176 of the Financial Investment Services And Capital Markets Act, which prohibits efforts to “attract anyone to trade listed securities or exchange-traded derivatives.”

While no SM Entertainment stock has been bought by Kakao yet, the K-pop agency's board of directors granted the rights to distribute music by most of its artists to Kakao Entertainment, according to a report by Korea Economic Daily on Thursday.

The contract states that domestic music distribution will be transferred to Kakao Entertainment as the prior distribution contract ends on June 2023. Moreover, SM Entertainment's global music distribution and ticket circulation of domestic concerts and fan meet-and-greets will be controlled by Kakao Entertainment.

SM Entertainment and Kakao are to form a joint venture to manage the SM artist activities in North and South America and to form a global K-pop group through global auditions, according to the reports.

A Kakao spokesperson confirmed the existence of a contract but said details are confidential.

On the same day, SM Entertainment announced via YouTube its plans to invest a total of 1 trillion won over the course of three years in music publishing businesses, fan community platforms, the building of multiple production centers and the acquiring of labels.

The company aims to establish three local production centers in Japan, the Americas and southeast Asia by 2025 as a part of the "SM 3.0" project and generate a total of 1.8 trillion won in sales and operating profit of 500 billion won in 2025.

“They are three separate independent ventures that will be situated overseas and fulfill the same purpose as the domestic production center does to perform duties in management, marketing and music publishing businesses,” said co-CEO Lee Sung-su.

“They will become the secondary, tertiary SMs in their respective regions and SM will carry out the goal to truly globalize K-pop.”

SM’s share jumped 4.29 percent to close at 126,300 won on Thursday, while HYBE's share remained the same as the day before at 187,700 won and Kakao climbed 0.48 percent to 62,500 won.

BY LEE JAE-LIM [lee.jaelim@joongang.co.kr]