SM puts cash cows up for sale as conflict with founder heats up

SM Entertainment Co., mired in conflict with its founder and former Chief Producer Lee Soo-man, is seeking to sell its shares in three key arms, worth a combined $460 million, and sent requests for proposals to potential buyers, according to people with knowledge of the matter on Thursday.

The three units up for sale are the online fan community DearU; management agency Keyeast Co.; and movie and drama production firm SM C&C Co. Their combined market value is 1.9 trillion won ($1.5 billion). 

They are listed on the junior Kosdaq market and controlled by SM Studio, wholly owned by SM Entertainment.

SM Studio owns 31.98% of DearU; 28.38% of Keyeast; and 29.56% of SM C&C. The stakes are worth 590 billion won ($460 million) in aggregate as of Thursday's market close.

The planned deal is aimed at exiting non-core assets and thus focusing on the music business, according to the sources. But it contradicts founder Lee’s ambition of expanding SM Entertainment into the metaverse virtual world.

The move comes as Lee locks horns with SM Entertainment’s top management, backed by Align Partners Capital Management.

The local activist fund accused the ex-chief producer of unfair business practices between his private companies and the entertainment powerhouse, which the fund said might hold him liable for legal punishment.

An SM official said that disposing of the non-core businesses would be aligned with Align Partners’ demand to boost its shareholder value.

But industry watchers said the sale plan, unveiled in haste, was seen as an attempt to hamper founder Lee’s sale of most of his SM shares to rival HYBE Co.

HYBE’s purchase of a controlling stake in the K-pop pioneer is aimed at bolstering its online fandom platform, where musicians hold online concerts and their characters are featured in merchandise.

Further, the acquisition is also expected to strengthen its intellectual property portfolios.

NEW ALLEGATIONS AGAINST FOUNDER LEE

Meanwhile, on Thursday, SM Entertainment’s co-CEO Lee Sung-soo opened fire on founder Lee.

The nephew of Lee’s deceased wife created a YouTube channel on Thursday, where he disclosed allegedly behind-the-scene contracts over its global business between the entertainment giant and Lee’s Hong Kong-based private company.

The Hong Kong unit, named CTP, has been kept under wraps.

The co-CEO claimed that his company had been forced to sign “abnormal” contracts with founder Lee. Under the contracts, CTP is allowed to take profits from the global sales generated by SM artists such as the boy group SuperM, Chinese boy band WayV and girl group Aespa.

Specifically, he pointed to the contracts in 2019 on global music distribution and streaming services signed with China’s SMO and two US record labels: Capital Records and Warner Records.

He accused the 70-year-old music artist of ordering that the three cross-border deals were sealed with Hong Kong-based CTP, which therefore entitled Lee to receive 6% of the profits derived from the global contracts.

Then the former chief producer was allowed to take an additional 6% in royalties from SM in relation to its global sales through Lee’s other private company Like Production.

Also, the co-CEO argued that Lee had pressed SM Entertainment to push back new music album releases scheduled for the current quarter, the first quarter when he was no more involved in the agency through Like Production.

Poor results during his absence could underpin his importance as a leader, he said.

Thursday’s disclosure is only the first of the 14 subjects of allegations he would make against founder Lee going forward, he said. 

Lee was not able to be immediately reached for comment.

(Updated with SM co-CEO's allegations against founder Lee)

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