Kakao vows to thwart HYBE scheme for SM control

Kakao Corp., South Korea’s dominant mobile platform, said on Monday it would mobilize all possible countermeasures against HYBE Co. ’s attempt to increase ownership of SM Entertainment Co. through a tender offer, hinting it might launch its own takeover bid for the K-pop pioneer.

It is the first time Kakao has offered a public response to the ongoing battle between SM’s top management and the BTS label, backed by SM Founder and former Chief Producer Lee Soo-man, to take control of SM.

Last week, HYBE became the largest shareholder of SM Entertainment through the purchase of a 14.8% stake from Founder Lee for $330 million. It also has launched a tender offer to raise its stake to as much as 39.8%.

For its part, Kakao is poised to secure a 9.05% stake in SM for 220 billion won ($165 million) in new shares and bonds to become its No. 2 shareholder. It had said the stake purchase was not aimed at securing control of SM, but at forming a strategic partnership.

But Monday's announcement indicated a shift in its stance.

“We can no longer take a wait-and-see attitude about the current situation, which will threaten the existence of our partnership with SM Entertainment and fundamentally hurt our mid-to-long-term growth plans,” Kakao Entertainment’s Chief Executive Kim Sung-soo said in a statement.

“It is now inevitable to revise the current strategy from scratch. We will seek to take all possible measures in close cooperation with Kakao,” it said, in reference to its parent company Kakao Corp.

It has not specified which measures it is considering against HYBE, the label behind the girl groups NewJeans and Le Sserafim.

The statement was issued a few days after HYBE threatened legal action to invalidate an undisclosed deal between Kakao and SM that hands over the rights to sell music albums and streaming services to Kakao Entertainment.

It was exclusively reported by The Korea Economic Daily last Thursday.

The agreement, contained in SM-Kakao’s share deal, also specified that Kakao will be granted exclusive rights to buy additional shares on top of the 9.05% stake and that the two sides will establish a 50:50 joint venture in the US.

HYBE criticized the deal, revealed during a court hearing last week, saying it would significantly undermine the interests of SM shareholders.

KAKAO’S ARGUMENTS

But Kakao dismissed HYBE’s argument as a distortion of facts and said it caused unnecessary disputes.

Regarding the clause in the contract that Kakao would take over the rights to sell music albums and streaming services, Kakao said SM has outsourced its music distribution to third-party companies.

About the preferential rights that allow Kakao to buy additional SM shares, Kakao said it was no more than an effort to prevent its ownership dilution should SM issue new shares in the future.

In return, SM will be able to utilize the intellectual property of its artists on Kakao’s platforms ranging from webtoons and web novels to AI and blockchain services.

To do so, it will build "a three-way horizontal partnership" with SM and its parent Kakao in various business areas so that they can explore global markets and protect shareholders’ rights,” the statement reads.

Earlier this month, Kakao agreed to join hands with SM, headed by co-CEOs Lee Sung-soo and Tak Young-jun, which had sought a strategic partner in its effort to wean itself off Founder Lee.

Kakao claimed it would be the most desirable partner for SM as a leading Korean music platform operator.

Shares in SM inched down 0.58% to close at 120,300 won on Monday, slightly above HYBE’s bid price of 120,000 won. It has said it would not raise its offer price.

Write to Jun-Ho Cha at chacha@hankyung.com

Yeonhee Kim edited this article.