BTS label HYBE seeks takeover of K-pop pioneer SM Entertainment

HYBE Co., the music label behind K-pop sensation BTS, is poised to acquire a controlling stake in its South Korean rival SM Entertainment Co. with maximum ownership of 39.8%.

On Friday, the BTS agency announced it signed an agreement to buy a 14.8% stake in SM from founder Lee Soo-man, who has debuted K-pop stars such as NCT, Red Velvet and aespa. HYBE is offering 120,000 won ($95) per share for a total of 430 billion won.

After the transaction, SM founder Lee’s ownership will fall from the current 18.46% to around 3%.

HYBE aims to secure an additional 25% stake in SM by March 1 through a takeover bid for more than 700 billion won, at the same offering price per share.

On Friday morning, SM shares jumped as much as 18.8% to 117,000 won, far outperforming a 1.39% fall in the junior Kosdaq bourse.

HYBE TO AID LEE IN FIGHT AGAINST ALIGN, KAKAO

The BTS label’s aggressive move is a sign it will help Lee, who is feuding with local activist fund Align Partners Capital Management and mobile platform giant Kakao Corp.

Align, which holds around a 1% stake in SM, has led a proxy war against the agency since 2021, demanding more returns to shareholders and better corporate governance.

As a result, SM ended its content production contract with Lee’s boutique firm Like Production, which had a significant amount of capital in royalties until the end of the last year. SM's board also tapped Align CEO Lee Chang-hwan to join its board in January for the entertainment agency’s governance restructuring. 

SM's management dispute was even more heated earlier this week as Kakao announced it will buy new shares and convertible bonds (CBs) in SM for a combined 217.1 billion won. If Kakao converts the bonds into equities, it will own a 9.05% stake.

Kakao is understood to be a friendly bidder on the SM board. SM founder Lee, the largest shareholder, is not a board member.

The founder is said to have proposed the deal to HYBE to secure stakeholders supportive of him.

HYBE has targeted the acquisition of SM shares since 2020 when Lee put his equities up for sale. The BTS label has been seeking the deal as the K-pop megaband members decided last October to fulfill their national military duty -- indicating they will suspend performing as a group for years. 

But SM founder Lee chose entertainment-and-food-focused CJ Group and Kakao as potential bidders, instead of the K-pop rival. The deals fell through as Lee, CJ and Kakao didn’t reach an agreement on the share price.

INVESTORS AWAIT KAKAO'S NEXT MOVE

Once it buys SM, HYBE will enhance its profitability through intellectual properties related to SM’s K-pop stars. Founder Lee will maintain 3% ownership and collaborate with HYBE Chairman Bang Si-hyuk, sources said.

Investors are paying attention to whether Kakao will fight back with a higher offering price than HYBE’s 120,000 won. The mobile platform giant, which operates Korea’s most popular messaging app Kakao Talk, secured a $964 million commitment from Saudi Arabia’s Public Investment Fund (PIF) and Singapore’s sovereign wealth fund GIC last month.   

Market watchers are eyeing the court’s decision on Lee’s application for an injunction filed on Feb. 8, against Kakao’s deal. If the court grants an injunction, HYBE is highly likely to win the ownership battle.

After HYBE’s announcement on Friday, Align stated the offering price per share is too low given the potential earnings of SM, which is set for great upside through its multi-producing system and enhancement of management efficiency.

“HYBE must carry out a tender offer to acquire the whole of SM's equities, not just 25%, as it aims to control the board of directors,” the activist fund said.

“If HYBE fails to fully own SM, it wouldn’t be able to prevent conflicts from the two firms’ minority shareholders,” Align added.

(Updated with statement from Align)

Write to Dong-Hun Lee and Jun-Ho Cha at leedh@hankyung.com

Jihyun Kim edited this article.