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Kakao offers W1.25tr to buy SM shares

March 7, 2023 - 15:01 By Song Seung-hyun
Kakao's Pangyo headquarters (Kakao)

IT giant Kakao on Tuesday announced a tender offer for SM Entertainment’s shares held by minority shareholders at a price higher than what Hybe previously offered amid an intensifying race to win over the management rights of the K-pop powerhouse.

Kakao and its subsidiary Kakao Entertainment offered 150,000 won ($115.55) per share with a goal to additionally secure up to 35 percent (some 8.3 billion shares) of SM Entertainment. This tender offer begins on Tuesday and ends on March 26.

This means that the IT conglomerate is willing to spend more than 1.25 trillion won for this tender offer.

SM Entertainment’s stock on Tuesday closed at 149,700 won, up 19,600 won from the previous trading day.

“Three companies (Kakao, Kakao Entertainment and SM Entertainment) signed a strategic business partnership deal because we saw each other as the best partners," Kakao said in a statement. "However this partnership and our mid- to long-term growth plans are being threatened, so we have no choice but to secure the biggest shareholder position.”

This offer came after Hybe -- which has been competing to become the largest shareholder of SM -- announced on Monday that its tender offer failed to reach its goal.

The agency of K-pop phenomenon BTS offered 120,000 won per share with a goal to additionally secure up to 25 percent (5,951,826 shares) of SM Entertainment. However, Hybe only could acquire 233,817 shares.

On Monday, Hybe -- currently SM Entertainment's biggest shareholder with a 15.78 percent stake -- also pressured the agency into terminating its strategic partnership with Kakao, saying it is unfair.

According to industry sources, Kakao will likely use a fund of around 1.15 trillion won that it attracted from Singapore's sovereign wealth fund GIC and Saudi Arabia's Public Investment Fund at the beginning of this year for this tender offer. Kakao received 897.5 billion won last month, and will receive the rest in July.

The mid- to long-term plans that Kakao referred to in its statement were announced by SM Entertainment co-CEOs Lee Sung-soo and Tak Young-jun last month.

Dubbed “SM 3.0,” SM Entertainment's new strategy put a lot of emphasis on expanding its intellectual property business to reach a sales goal of 1.2 trillion won by 2025. The plan also cuts SM Entertainment founder Lee Soo-man, who was the main producer of the agency, out of the picture.

The feud between SM founder Lee and the agency’s executives began surfacing through this SM 3.0 announcement as well.

Kakao has been supporting this plan and signed the strategic partnership. To show its support, the tech giant’s initial plan was to acquire a 9.05 percent stake in SM Entertainment and become the agency’s second-biggest shareholder.

However, this became impossible as the court last week ruled in favor of SM Entertainment founder Lee on his request to block Kakao's bid. The court judged it illegal to issue new shares and convertible bonds to Kakao -- a third party -- when the agency is currently going through a business management dispute.

This tender offer is an alternative measure that Kakao came up with to gain management control over SM Entertainment.

Industry insiders see that ongoing tensions over the SM Entertainment acquisition will likely continue until the regular shareholders' meeting, slated for March 31.

Meanwhile, Kakao also announced Tuesday that it currently owns 4.9 percent of SM Entertainment, which the company bought from the stock exchange market recently. Since the amount is less than 5 percent, Kakao was not mandated to disclose this information under the current law.