Kakao struggles to acquire SM Entertainment amid founder's demands

SM Entertainment founder and chief producer Lee Soo-man / Courtesy of SM Entertainment

By Kim Jae-heun

Kakao has been in a dilemma over its attempt to acquire SM Entertainment, as SM founder and chief producer Lee Soo-man continues to request his involvement in the management of Korea's largest talent agency, even after he sells his entire 18.27 percent stake in it, according to industry officials. Lee also reportedly wants SM to maintain a contract with his personal firm.

It looked like the deal was nearly closed until last week, as Kakao Entertainment agreed to pay somewhere between 600 billion won ($492.9 million) and 1 trillion won to purchase Lee's stake. However, Lee has asked again to ensure the continuation of his current management authority at SM Entertainment.

In 2021, Lee received 24 billion won in royalties from SM through the company's content-producing affiliate, Like Planning, which is wholly owned by the chief producer. The figure accounts for 35.6 percent of SM's operating profit of 67.5 billion won. The founder reportedly requested Kakao to maintain the producing contract between SM Entertainment and Like Planning.

"I think Kakao cannot simply accept Lee's demands, because they go against the way it does business," an industry official said on condition of anonymity. "The platform firm, which has been engulfed in a range of criticisms in recent months, desperately needs SM Entertainment for its competitive media content. But Kakao has no other choice but to give up on SM if Lee continues making such demands."

However, the situation has turned against the SM founder after the talent agency held its general shareholders' meeting on March 31, during which minority shareholder Align Partners took away one of the company's auditor positions.

Figure TKakao CEO Namkoong Whon talks during an online press conference on Aug. 26, 2020. Yonhap

The private equity firm has been raising questions about the fairness of the contract between SM Entertainment and Like Planning, and it decided to bring in an external auditor to examine the talent agency's business management. Align Partners holds a 0.91 percent stake in SM Entertainment.

For years, minority shareholders have been demanding that the talent agency restructure its corporate management by weakening Lee's grip and introducing shareholder-friendly policies.

KB Asset Management, the third-largest shareholder, requested in 2019 for SM Entertainment to merge with Like Planning, but the request was rejected, and SM Entertainment has continued refusing to consider the move.

Last month, Align Partners also asked SM Entertainment to terminate its producing content with Like Planning, but SM co-CEOS Lee Sung-su and Tak Young-jun refused by saying that the company is going through major management changes, referring to the acquisition deal with Kakao.

Kakao Entertainment officials have said that they cannot comment on the issue as the deal is being negotiated.

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