Kakao closes in on $800 mn deal to buy SM Entertainment stake

Kakao Entertainment Corp., a unit of South Korea's top mobile messenger app, is in the final stages of talks to buy a controlling stake in SM Entertainment Co., the country's music label widely credited as the pioneer of K-pop, in a deal estimated at 1 trillion won ($810 million).

According to people with knowledge of the negotiations on Friday, Kakao is planning to acquire an 18.72% stake in SM from its founder and top shareholder Lee Soo-man, as well as purchasing shares to be issued by the entertainment giant to increase its ownership. 

SM's Lee will likely put the proceeds from the stake sale back into unlisted Kakao Entertainment to buy its shares. 

A definitive agreement will be reached within the month, the sources said.

Previously, SM, the agency behind H.O.T, S.E.S, Girls' Generation, Exo and Red Velvet., entered into exclusive talks with CJ ENM  Co. to sell Lee's shares.

But their negotiations faltered around the end of last year, after CJ failed to narrow the difference over SM's new business plans in the realms of the metaverse digital space and non-fungible digital tokens (NFTs).

Early this year, SM resumed talks with Kakao.

"Kakao continuously expressed its interest in SM, even when SM was negotiating with CJ ENM," one of the sources told Market Insight, the capital market news outlet of The Korea Economic Daily.

"After SM returned to the negotiating table with Kakao, Kakao agreed to accept whatever SM demanded."

The takeover of SM, which controls 20% of the domestic entertainment management market, would put Kakao on par with the country's two other entertainment giants: HYBE Co., the label behind boy band BTS and YG Entertainment Co. of BlackPink.

Kakao Entertainment owns dozens of management firms including Play M Entertainment and Starship Entertainment and music labels, which boast top Korean artists such as IU and K. Will.

Last year, Kakao acquired Antenna, a small Korean entertainment firm, which has the country’s top TV entertainer Yoo Jae-suk and popular singer-songwriter Yoo Hee-yeol under its wing.

The SM Entertainment stake sale was once seen as a battleground between Kakao and Naver Corp., as they were intensifying their rivalry in a broader range of areas ranging from webtoons to entertainment.

Naver, the country's dominant internet portal, had entered into early stage talks with SM on the possible stake sale, but pulled out of the race.

IPO OF KAKAO ENTERTAIMENT

Taking control of SM, Kakao Entertainment is expected to enhance its corporate value as it is aiming to go public by next year.

The entertainment arm of Kakao Corp. is targeting an enterprise value of 20 trillion won, close to the current market capitalization of SM Entertainment, by the time of its stock market debut.

For SM, the stake sale will likely create an opportunity to join forces with Dunamu Inc., the country's largest cryptocurrency exchange operator, to venture into NFT-based services. Kakao is a key shareholder of Dunamu.

SM's K-pop fandom platform DearU Co. is expected to collaborate with Kakao's entertainment agencies to better compete with HYBE’s fan community Weverse.

Shares of Kakao rose 3.36% to close at 79,900 won on Friday, against a 0.71% decline in the wider Kospi market.

Write to Chae-Yeon Kim and Jun-Ho Cha at why29@hankyung.com
Yeonhee Kim edited this article.