SM Entertainment deal: The takeover battle for the future of K-pop is fierce

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Hong Kong/Seoul

Kakao, one of South Korea’s leading Internet giants, has doubled down in its bid to take control SM Entertainment, the famous K-pop music group.

The tech company announced on Tuesday that it would seek to buy up to 35% of the music label, just days after a previous share sale between the two parties was blocked by a Korean court. If successful, he would own about 40% of the company.

Kakao and its entertainment unit have launched a tender offer worth about 1.25 trillion Korean won ($962 million), according to a regulatory filing. They plan to offer 150,000 won ($115) per share to SM shareholders. That would be a premium to what they were offered last week by HYBE, another Korean music group best known for representing superstar boy band BTS.

If successful, it would also make Kakao SM the largest shareholder, a position currently held by HYBE, a major K-pop group due to the success of BTS.

Last week, HYBE had offered 120,000 won ($92) per share in its own tender offer to investors, with which it hoped to acquire another 25% share of SM. On Monday, the group BTS revealed that their bid had increased, increasing their holding by only 0.98%.

HYBE now owns 15.8% of SM, a regulatory filing showed, consisting of shares received from the tender offer and its previous holding of 14.8% purchased through a separate deal on last month.

The latest surprise move by Kakao, one of the country’s biggest tech companies, adds to an already complicated series of shareholder battles playing out over SM Entertainment.

SM was founded by Lee Soo-man, a legendary music producer widely known in South Korea as the “father of K-pop.” The company is known for representing famous artists, such as NCT 127, EXO, BoA and Girls’ Generation.

Recently, Lee has been fighting with the management of his company in several areas – including how much of the company should be sold to Kakao or HYBE.

HYBE entered the market last month, when Lee sold most of his personal shares to the group for 422.8 billion Korean won ($334.5 million). It has a stake of 3.65%, according to a regulatory filing on Monday.

In the past few weeks, HYBE has been working to raise its total amount to 40%, launching a very public spat with the leadership of SM, who accused the former of not he attempted a hostile takeover and eventual monopoly. HYBE has dismissed those concerns, noting that its first bet was bought “with permission” from Lee.

South Korean band NCT 127 attends a festival at Jamsil Arena in December in Seoul.  The artists are represented by SM Entertainment, which is currently in the middle of several shareholder disputes.

At the same time, Lee also insists with SM management on his desire to work more closely with Kakao.

The internet titan is ubiquitous in South Korea, known for its popular messaging service, Kakao Talk, and music streaming platform, Melon, which has been compared to the country’s version of Spotify .

Kakao and its Kakao Entertainment unit already hold 4.9% of SM, the company told CNN in a statement on Tuesday.

Last month, the company said it had agreed to buy a 9% stake in SM by buying new shares and convertible bonds. But Lee moved to block the deal through a court injunction.

In a statement shared by CNN at the time, his law firm, Yoon & Yang, said that Lee and SM were “going through a business management dispute,” and that it was illegal “to board SM will direct the issuance of new stock and convertible bonds to a third party” when such a dispute was ongoing.

On Friday, the Seoul Eastern District Court granted Lee’s request for an injunction, prohibiting SM Entertainment from selling new shares or issuing convertible bonds to Kakao, Lee’s legal representative told CNN in the statement.

Kakao is moving forward nonetheless, inviting SM shareholders to accept its tender offer, which will expire on March 26.

Kakao wants a strategic business partnership with SM, “judging each other as the best partners” to compete against global entertainment conglomerates.

Now, those plans are “in jeopardy,” leaving Kakao with no choice but to acquire the largest shareholder position in SM to “maintain a stable partnership,” the technology company told CNN in a statement.

Kakao’s investors appeared to be aware of the offer. Its shares closed 3% lower in Seoul on Tuesday, while SM shares rose 15%.

The Kakao office building in the Pangyo district of Seongnam, South Korea, in October.

SM, for its part, said it wanted to move forward with Kakao because of its “respect [for] the current management’s efforts to address factors that have hindered SM Entertainment’s growth.”

“Unlike HYBE, who is trying to take control of the SM board through hostility [acquisition]Kakao respects SM’s unique heritage and identity, and will ensure that the company operates independently, as well as the ongoing activities of SM artists,” he said.

Lee did not immediately respond to a request for comment on news of Kakao’s tender offer on Tuesday, and HYBE did not immediately respond to a request for comment on its next steps.

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