HYBE loses 1st battle against Kakao for SM Entertainment

South Korea’s HYBE Co. lost its first battle against dominant local mobile platform Kakao Corp. over SM Entertainment Co. as the label behind the world’s top boy band BTS failed in its tender offer for the K-pop pioneer.

SM’s stock ended up 6.07% at 127,600 won ($96.3) on Tuesday, the last day of HYBE's offer period, higher than its bid price of 120,000 won per share.

The label behind the world’s top boy band on Feb. 10 unveiled a plan to take control of SM, known for aespa and NCT, by securing about a 40% stake through a tender offer to buy a stake of up to 25% from minority shareholders at the price by March 1, a South Korean holiday, in addition to the purchase of a 14.8% stake from SM founder and top shareholder Lee Soo-man. HYBE was set to pay $330 million to Lee.

Few minority shareholders appeared to have participated in the tender offer since SM’s stock has been closing above 120,000 won in the domestic stock market since Feb. 15 when shares rose above the bid price. Meanwhile, any shareholders who had agreed to sell their stocks to HYBE were also allowed to withdraw the decision on the last day depending on the share prices.

With the bid's failure, the battle for SM between HYBE and Kakao has entered its second round. The operator of the country’s top messenger app Kakao Talk earlier this month said it plans to secure a 9.05% stake in SM via stocks and convertible bonds for 220 billion won to become the No. 2 shareholder in the K-pop powerhouse. SM’s founder Lee challenged the deal and filed for a court injunction. 

KAKAO’S TENDER OFFER

Kakao is expected to launch its own tender offer to raise its stake once the court makes a decision on the injunction, industry sources said.

The IT behemoth was known to have completed preparation for the takeover bid regardless of the court’s ruling. Kakao will be able to jointly manage SM with HYBE as the No. 2 shareholder if the court rejects the injunction, allowing the company to obtain the 9.05% stake. Kakao may secure a larger stake than HYBE through the expected tender offer to become the largest shareholder if the court rules in favor of Lee.

Kakao has enough money for the takeover bid as Kakao Entertainment Corp. has already raised some 900 billion won from Saudi Arabia’s Public Investment Fund (PIF) and Singapore’s sovereign wealth fund GIC.

Kakao reportedly aggressively bought SM’s shares before the tender offer, South Korean stock market sources said.

MYSTERIOUS INVESTORS

HYBE had hoped its tender offer would go through when earlier in the day SM’s stock traded briefly below its bid price.

But an unknown investor spent 134 billion won to buy a 4.56% stake in SM, boosting SM's share prices. Another mysterious investor bought a 2.9% stake for 84.9 billion won on Feb. 16 when SM’s stock hit a record high of 133,600 won.

Local stock market sources suspected these two are the same investor, who was supported by Kakao. If one investor bought those shares, it would need to disclose the purchases through a regulatory filing within five days of its stake exceeding 5%. 

That could cause legal battles over allegations of market manipulation or breach of trust as the purchases blocked HYBE’s tender offer on two occasions.

South Korea’s financial regulators and the Korea Exchange are checking for any unfair trading while monitoring transactions and prices of SM shares, according to officials.

“We are closely examining any allegations related to unfair trading through preliminary probes and monitoring as the dispute over management control of SM has begun, stoking interest among market participants,” said an official at a financial regulator.

Earlier, HYBE said it has urged the Financial Supervisory Service to investigate the Feb. 16 trading for any violations of the Capital Market Act.

HYBE’S COUNTERATTACK

HYBE reportedly has decided to focus on securing shareholders’ voting rights as its tender offer failed, industry sources said.

The company was also known to be preparing strategies to dominate SM’s board of directors in the annual shareholder meeting next month as it could not secure enough shares for stable management control, according to the sources.

HYBE may consider block deals to buy stakes held by institutional investors at around 120,000 won once SM’s stock falls while leaving the door open for another tender offer.

“We may consider various measures depending on the situation, although we decided not to launch an additional tender offer and stuck to the bid price during our latest tender offer period,” said an HYBE official.

Write to Jun-Ho Cha and Ji-Eun Ha at chacha@hankyung.com
 
Jongwoo Cheon edited this article.