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Kakao to take control over SM

After monthlong feud, Kakao, Hybe, SM agree to join hands for growth of K-pop

March 12, 2023 - 16:05 By Im Eun-byel
The Kakao headquarters is pictured in Seongnam, Gyeonggi Province, Sunday. The raging takeover battle between Kakao and Hybe for SM Entertainment has come to a halt as Hybe withdrew from the competition after the two struck a deal. Under the compromise, Kakao would acquire the K-pop label and Hybe would pursue a platform business partnership with the tech giant. (Yonhap)

The heated competition to take over leading K-pop agency SM Entertainment seems to have come to a sudden, amicable halt, as IT giant Kakao is set to seize control of the label while its rival Hybe, the K-pop powerhouse behind global sensation BTS, has decided to drop its bid with future cooperation in mind.

“Hybe assessed that the market is showing signs of overheating, following the rivalry with Kakao and Kakao Entertainment,” Hybe said through an official statement on Sunday.

“The decision was made considering this could have a negative impact on Hybe’s shareholder value.”

Following the announcement, Kakao also released a separate statement saying it respects Hybe’s decision.

“Kakao and Kakao Entertainment are partners of Hybe and SM Entertainment, impacting each other positively,” it said. “We agreed to maintain a cooperative relationship to uplift the global status of K-culture, including K-pop.”

Kakao said it will go forward with its tender offer to buy an additional 8.33 million shares of SM through March 26 as planned. It has offered a price of 150,000 won ($113) per share, aiming at a combined 35 percent stake.

SM also welcomed the decision.

“With this decision, SM will accelerate the implementation of SM 3.0 to achieve the vision of the company, ‘moving forward to become a fan- and shareholder-centric global entertainment leader,’” it said through an official statement.

“In doing so, we will continue to enhance our corporate value and expand shareholder return policies for all shareholder,” the statement read.

The companies said further plans on the SM shares owned by Hybe and the agreement on the platform business between the two agencies will be shared soon.

Kakao, operator of the nation’s No. 1 messenger app KakaoTalk and other popular platform services, has been aggressively expanding its entertainment business.

Its acquisition of SM is seen as a move to secure a wide range of intellectual property to broaden its entertainment business spectrum.

“We plan to create new synergy through SM Entertainment’s global intellectual property rights, producing system, Kakao and Kakao Entertainment’s IT technology and IP value chain, surpassing mere expansion of music IP,” Kakao said.

The acquisition could also boost Kakao Entertainment's initial public offering plan, bringing the target price up based on increased company value. The IPO plan has been in the talks for months, while Kakao has maintained its stance, "Nothing has been decided yet."

The market speculates Hybe was pressured by Kakao’s abundant cash flow.

As of the third quarter, Kakao's cash and cash equivalents mounted to 4.5 trillion won. Its subsidiary Kakao Entertainment also secured an investment of 1.2 trillion won from Singapore's GIC and Saudi Arabia's Public Investment Fund earlier this year.

Hybe, on the other hand, reportedly has some 1.9 trillion won to fund the deal. Hybe said through Sunday’s statement that its tender offer for SM at 120,000 won per share was made considering SM’s value and expected expenses from the post-merger integration.

Having made its decision to concede the race, Hybe, with 15.78 percent of SM shares, has to report its status of corporate consolidation to the Fair Trade Committee within 30 days since the stock acquisition deal was made on March 6. It has to sell some of its shares in SM or report it to the financial authority.

With Hybe backing down, the takeover bid, which began more than a month ago, has come to an end.

In early February, Kakao signed a partnership deal with the co-CEOs of SM Entertainment, Lee Sung-soo and Tak Young-jun, to buy a 9.05 percent stake in the K-pop agency.

Founder Lee Soo-man found an ally in Hybe for a counterattack, selling his 14.8 percent stake in the company. Lee also filed an injunction request, calling for the court to block the deal between SM and Kakao, which was eventually approved.

Hybe and Kakao went for a tender offer, offering to buy shares of SM at 120,000 won and 150,000 won, respectively. However, both tender offers have been challenged by SM's skyrocketing share price.

SM closed at 154,900 won on Friday, 57.3 percent up from 98,500 won on Feb. 9, before Hybe called for its tender offer. It peaked at 161,200 won on March 8. Prior to the takeover bid, SM shares remained in the 70,000 won range earlier this year.