Kakao offers to buy 35% of K-pop label SM to fend off rival Hybe

KAKAO, South Korea’s Internet giant, is launching a tender offer to become the largest shareholder at SM Entertainment, escalating a battle for control of the K-pop label with entertainment powerhouse Hybe.

Kakao and its entertainment unit, Kakao Entertainment, are offering to buy up to a 35 per cent stake in SM for 150,000 won per share, with the total value of the offer about 1.25 trillion won (S$1.29 billion). The duo currently hold about 4.9 per cent of SM shares and the tender offer could take that to almost 40 per cent.

SM shares surged 14 per cent to just below the offer price. They traded at less than 80,000 won for most of the year through January.

The deal, if successful, would help Kakao and SM’s existing management fend off Hybe’s effort to take control of the rival music label. Kakao had said earlier that it had no intention of taking a controlling stake, and suffered a setback last week when a court blocked its proposed purchase of a 9 per cent holding at SM.

“We believe that this will be a successful tender offer,” said analyst Douglas Kim, who writes on the Smartkarma platform. “The minority shareholders of SM Entertainment are cheering on as its share price appreciation will be nearly 96 per cent from end of 2022 to the tender offer price of 150,000 won.”

Hybe, the label behind global phenom BTS, failed to get much support for its own SM tender offer, opening the door to a bidding war. The Kakao bid price is 25 per cent above the 120,000 won offered by Hybe.

Hybe, which secured a 14.8 per cent stake in SM from founder Lee Soo-man, added only a fraction of the shares in rival SM in its offer, an embarrassing setback for the label which had argued its takeover attempt was critical to preserving K-pop’s global influence. Hybe secured about 15.8 per cent shares and it can also control a further 3.65 per cent voting rights on behalf of the founder Lee.

Backed by Saudi Arabia’s wealth fund and Singapore’s GIC, Kakao and its entertainment unit are eager to secure intellectual property of K-pop talent for overseas expansion. South Korea’s largest messaging operator has been mulling a listing of its entertainment unit overseas or at home. SM’s executives also explained Kakao’s platform business and technology is essential for them to grow globally.

Kakao said that its bid to become SM’s largest shareholder is necessary to ensure stable management at the music label, and it plans to support the current leadership at the company.

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It’s unclear whether Hybe will make a counteroffer and try to fend off Kakao.

“We believe this probability is VERY LOW,” Kim wrote, citing Hybe’s need for financing to engage in such a pricey fight.

The takeover battle will take centre stage at SM’s annual shareholders’ meeting scheduled on Mar 31. Both sides are seeking to form a board with their recommended directors. BLOOMBERG