Kakao hits snag in $815 mn SM Entertainment takeover plan

Kakao Entertainment Corp. has hit a snag in its talks to buy a controlling stake in SM Entertainment Co., according to those familiar with the negotiations. 

Named after its founder Lee Soo-man, SM Entertainment is widely credited as the pioneer of K-pop and still manages some of the biggest talent in the industry. 

The entertainment unit of South Korea's top mobile messenger app operator Kakao Corp. was scheduled to wrap up the deal estimated at 1 trillion won ($815 million) last week. The news of the possible takeover first made headlines earlier this month.

Under the agreement, Kakao was to purchase the entirety of Lee’s 18.27% stake in the company, as well as purchase shares to be issued by the entertainment giant to increase its ownership. SM's Lee was expected to put the proceeds from the stake sale back into unlisted Kakao Entertainment to buy its shares. 

Those familiar with the negotiations told The Korea Economic Daily that the latest delay is due to Lee reportedly asking for an additional clause to the contract to maintain the current level of management rights to the entertainment juggernaut. 

“Kakao Entertainment wants to acquire SM to create a synergy effect with other entertainment businesses it owns,” an industry insider explained. “It will be hard for Kakao to meet Lee’s demand as the priority will be on running the whole gamut of businesses in a harmonious manner.”

The entertainment arm of Kakao 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.

Industry insiders say the SM Entertainment founder also requested a hefty salary, possibly in regards to the additional revenue he brought in through a boutique firm wholly owned by him. 

Through the independent company called Like Production, Lee received 24 billion won in royalties from SM Entertainment last year. 

The logic is that if Kakao Entertainment acquires SM Entertainment, it will not be able to channel that level of funds to the boutique firm. Industry insiders say Lee must have calculated the salary figure to compensate for the potential loss in profits.

Kakao is putting the contract on hold and continuing negotiations on the additional conditions that Lee has put forth, sources said. 

SM Entertainment recently held a shareholder meeting to discuss amending its articles of incorporation. Industry insiders say that may have been part of its efforts to appear more attractive to Kakao. 

The company held a board of directors meeting on March 16 and introduced a number of measures to protect the management rights of executives, such as changing the closing date of the shareholder list to two weeks prior to a shareholder meeting.

Even though measures did not materialize due to shareholder dissent, investors view that the move was enough to show Lee’s willingness to pull out of the ongoing negotiations with Kakao if his demands are not met. 

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.

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

Write to Min-Ki Koo at kook@hankyung.com
Jee Abbey Lee edited this article.