HYBE’s SM Entertainment takeover plan falls short, Kakao launches $960m offer for controlling stake

The corporate drama playing out in the music business in South Korea just entered its latest act.

South Korean internet giant Kakao Corp. has launched a tender offer to acquire a 35% stake in SM Entertainment as HYBE’s tender offer to purchase another 25% of the K-Pop company fell through.

HYBE on Monday (March 6) said it acquired an additional 0.98% stake in SM Entertainment, raising its ownership to 15.78% after buying a 14.8% stake in February.

The result of the tender offer means that SM Entertainment’s shareholders are not buying into HYBE’s plan to take control of its rival.

HYBE had planned to acquire an additional 25% of SM Entertainment which would have given it a 40% stake in the company.

The company had offered to buy as much as 5.95 million shares in SM Entertainment at 120,000 won (approx. $92.14) apiece. But only 233,817 SM shares were tendered to HYBE for a total of 28.06 billion South Korea won ($21.5 million).

HYBE, the agency behind BTS, even launched a campaign last week, urging SM shareholders to support its planned takeover that according to HYBE CEO Jiwon Park, would pave the way for “an era of change for both companies.”

The battle for a controlling stake in SM took a turn on Monday (March 6) after a court in Seoul granted a provisional injunction — filed by SM Entertainment’s former executive producer, Lee Soo-man — to block SM from issuing new shares and convertible bonds.

That would have seen Kakao buying a 9.05% stake in SM as part of the latter company’s bid to prevent HYBE from launching a “hostile takeover attempt.”

While the court ruling gave HYBE a head start in its takeover bid, the result of the tender offer — that started on February 10 and ended March 1 — indicated that HYBE’s plans for SM were not appealing to minority shareholders.

SM Entertainment’s share price rallied 15% to close at an all-time high on Tuesday (March 7), while HYBE’s shares fell 1.7%. Kakao’s shares slipped 3.3% the same day in Seoul trading.

With a court injunction in place, blocking SM from issuing new shares, Kakao now plans to build a 35% stake in SM Entertainment by buying shares from existing shareholders in a deal that could reach 1.25 trillion South Korean Won (approx. USD $960 million).

Kakao disclosed in a stock exchange filing on Tuesday (March 7) that it intends to buy around 8.3 million shares in SM at 150,000 South Korea Won per share.

Kakao currently owns a 4.9% stake. If its tender offer is successful, it will own approximately 40% of SM Entertainment,

The offer price represents a 15.3% premium to SM’s closing price of 130,100 South Korea won on Monday.

In its tender offer prospectus, Kakao said it plans to build a substantial stake in SM as it diversifies its business alongside SM “in a rapidly changing music and content environment”.

Back in February, when Kakao and SM Entertainment started talks to form a strategic partnership, they signed a business cooperation agreement to bolster the competitiveness of SM Entertainment and promote the globalization of K-Pop, Kakao, which operates as a mobile and Internet-based platform, said.

After acquiring a substantial stake in SM, Kakao said it will focus on the development of the music label and promote omnidirectional business cooperation as its long-term partner. 

“We will continue multilateral cooperation in the music business of both companies, including distribution.”

Kakao Corp.

In the future, both companies aim to operate overseas talent management services and foster artists, while continuing to enhance the status of K-Pop, Kakao added.

“We will continue multilateral cooperation in the music business of both companies, including distribution,” Kakao said in a translated text of its prospectus.

Korea Investment & Securities is serving as the underwriter of Kakao’s tender offer.

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