Battle for SM management heats up between Lee-HYBE and SM-Kakao blocs

SM Entertainment founder Lee Soo-man, left, and HYBE Chairman Bang Si-hyuk / Courtesy of SM Entertainment and HYBE

Each bloc criticizes the other for attempting 'hostile M&A'

By Anna J. Park

With the war being waged surrounding SM Entertainment's controlling stake between SM Entertainment's founder Lee Soo-man, in alliance with HYBE, and the current management of SM, who has teamed up with Kakao and activist fund Align Partners, market attention is now on how the situation might unfold.

So far, the Lee-HYBE bloc seems to have won an easy battle. The global entertainment company that created K-pop titan BTS has already become the largest shareholder of SM Entertainment with its surprise acquisition of 14.8 percent stake from SM founder Lee, as officially announced last Friday. HYBE now holds the 14.8 percent stake in SM, followed by National Pension Service (NPS)'s 8.96 percent, KB Asset Management's 5.12 percent, and SM founder Lee's 3.66 percent and numerous other minor shareholders.

On top of the 14.8 percent stake, HYBE has kicked off a tender offer last Friday, offering 120 thousand won ($94.68) per share, as HYBE aims to secure an additional 25 percent stake in SM Entertainment. Any shareholders of SM who wish to sell their stock to HYBE's tender offer can do it by Feb. 28, as the tender offer will close on March 1, which is a national holiday when local stock markets do not open.

If HYBE succeeds at securing the targeted stake through the tender offer, the company will hold a 39.8 percent stake in SM. When adding founder Lee's remaining stake of 3.66 percent, HYBE gets to control nearly a 44 percent stake in SM shares. It could take hold of the majority of the stakes, if it receives additional six to seven percent stake's support from other key shareholders. In this case, the war for managerial rights of SM Entertainment would end with the Lee-HYBE bloc's win.

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Yet, the situation might not unfold the way the Lee-HYBE bloc has expected. The current management of SM, led by co-CEOs Lee Sung-soo and Tak Young-jun, called the Lee-HYBE bloc's move a "hostile M&A" in its official statement announced immediately following HYBE's acquisition of SM shares.

"SM opposes all attempts at hostile M&As by external entities, including HYBE. On the contrary, the strategic partnership with Kakao has been determined by the company, aiming at accelerating the implementation of SM 3.0 visionary goals, which has nothing to do with a managerial conflict, as alleged by the firm's largest shareholder," SM's statement reads.

SM's current management struck a strategic partnership with Kakao early this year, as the big-tech announced on Feb. 7 that it signed a deal to acquire a 9.05 percent stake in SM. The acquisition was to be conducted in a two-pronged manner; about half of the shares being acquired through convertible bonds (CB), a fixed-income debt security that will later be converted into equity shares, while the remaining half were to be acquired through offerings of new shares by allotment to third parties, slated for March 6.

This deal would have made Kakao the second largest shareholder of SM, following SM founder Lee. Lee, taking the deal as a threat to his grip of the firm, filed an injunction on Feb. 8, the day after the announcement of Kakao. The founder asked the court to prevent SM from offering new shares through allotment to third parties, citing grounds from the country's business law.

The rationale behind Lee's legal action was that the incumbent SM management had already been at odds with founder Lee. The SM management had agreed to improve the corporate governance of SM last year, as suggested by activist fund Align Partners, which also holds a minor stake in the entertainment company. Other key shareholders of NPS and KB also sided with the activist fund's campaign for improving SM's age-old corporate governance that has granted excessive personal favors to founder Lee. Lee Soo-man saw the formation of the bloc to be detrimental to his status at the firm. At the same time, Lee asked for help from HYBE to take over part of his stake.

If the injunction is dismissed, Kakao will get to own the 9.05 percent stake in SM. In that case, Kakao has a few options. One of which is to cooperate with HYBE, while aiming to realize business synergy with SM.

However, if Lee's court injunction is accepted, Kakao might cancel its plan to acquire the 9.05 percent stake. Or the big-tech might even attempt its own tender offer, aiming to garner a larger stake than HYBE by offering a higher price than offered by HYBE.

Thus, market attention is on Kakao's next move regarding the issue, but it hasn't yet released its official stance.

SM seems to be having an internal feud over the matter. SM's executive director Cho Byung-kyu criticized the incumbent leadership of SM, that it is Kakao that attempted a hostile M&A, not HYBE.

"HYBE is conducting a benign M&A. It is the incumbent management of SM, Kakao and Align Partners that are trying to increase stake against the will of founder Lee," he wrote in a mail sent to all employees of SM.

HYBE guarantees SM's independence

Meanwhile, HYBE CEO says the company will ensure the independence of SM after its acquisition. The global entertainment firm's CEO Park Ji-won said that HYBE respects SM's legacy, stressing that the firm will guarantee SM's independence.

"HYBE has already proved a successful operation of multi-label producing systems," the CEO said during a recent talk session with HYBE employees at the firm's headquarters. "SM has its own values, and HYBE will help it to maintain its uniqueness and support it," he continued.