Kakao launches tender offer to win controlling stake in SM Entertainment
The headquarters of Kakao Entertainment located in Seongnam, Gyeonggi Province / Yonhap
Kakao to inject up to 1.2 trillion won to become largest shareholder
By Anna J. Park
Kakao has launched its own tender offer Tuesday, aiming to acquire an additional 35 percent stake in SM Entertainment. It is a major counterattack move by the big tech against HYBE, following HYBE's failure to acquire its targeted stake of SM through its tender offer that ended at the end of last month.
If Kakao's tender offer succeeds, the IT conglomerate will become the largest shareholder of SM Entertainment with a 39.91 percent stake, while also winning the management rights of the company. HYBE will then be pushed back to the second-largest shareholder with its 19.43 percent stake.
According to a regulatory filing by Kakao and its entertainment subsidiary Kakao Entertainment on Tuesday, the two companies plan to purchase a total of 8.33 million shares, or a 35 percent stake in SM Entertainment, through the tender offer at the price of 150,000 won ($115) per share. This means that Kakao will inject up to 1.25 trillion won to acquire the majority stake.
As the offer will be valid from Tuesday to March 26, shareholders wanting to sell their shares to Kakao can register themselves to the tender offer through Korea Investment & Securities.
Kakao's tender offer price is more than 25 percent higher than HYBE's last tender offer price of 120,000 won in February. It is also 14.5 percent higher than 130,100 won, which was Monday's closing price for SM.
With the tender offer announcement made to the public in early Tuesday, the stock price of the entertainment company founded by Lee Soo-man soared to 149,200 won at around 10:30 a.m. during Tuesday's trading session, the all-time high since its listing on the tech-heavy Kosdaq in 2020. It ended at 149,700 won, a 15.07 percent increase from the previous session, at Tuesday's closing.
SM Entertainment founder Lee Soo-man, left, and HYBE Chairman Bang Si-hyuk / Courtesy of SM Entertainment and HYBE
Tug-of-war surrounding SM management rights
HYBE and Kakao have been in a tug-of-war for the management rights of SM Entertainment since early this year. In January, Kakao and the current management of SM formed a deal to strengthen their strategic partnership. Under the deal, Kakao was to acquire a 9 percent stake through issuing of new shares and convertible bonds. Yet, SM founder Lee Soo-man filed an injunction against the move in February, blocking Kakao's encroachment into management of the entertainment firm.
Lee also sold his 14.8 percent stake to HYBE, another global K-pop powerhouse, in early February. HYBE then launched a tender offer until the end of February to acquire an additional 25 percent stake of SM. However, the offer ended up a complete failure, according to its tender offer results announced late Monday. HYBE ended up only acquiring 0.98 percent more through the tender offer from the stock market.
Against that backdrop, Kakao has decided to strike a direct blow to HYBE by offering a much higher price than HYBE's. Kakao saw no other option but to make another tender offer, as its original plan to become SM's strategic partner with the 9 percent stake was crushed by a local court granting Lee's injunction last Friday.
Now what remains to be seen is whether HYBE will launch another tender offer at a price higher than 150,000 won to win back the majority stake in SM, or whether the two companies will fight for management rights at SM's shareholders' meeting slated for March 31.
HYBE under antitrust regulator's merger review
Meanwhile, HYBE is facing another hurdle in its quest to control SM Entertainment, as it is now obliged to report to the Fair Trade Commission (FTC) for a merger review.
Despite its failure to acquire the intended 25 percent stake through its last tender offer, HYBE ended up purchasing 0.98 percent more through the offer. Considering HYBE already held a 14.8 percent stake bought from SM founder Lee in early February, the BTS-producing company now holds more than 15 percent of SM Entertainment shares.
When a company with assets or revenue exceeding 300 billion won holds a more-than-15 percent stake in another company with revenue exceeding 30 billion won, it is obliged to report to the FTC for a merger review. The fair trade agency will then make a decision on whether to allow the merger or not within a maximum period of four months.
Since it will be a union between the top two entertainment firms in the country, the FTC's decision is also expected to play a huge role in the continuing battle between Kakao and HYBE.