HYBE wins 2nd battle against Kakao over SM Entertainment

A South Korean court on Friday ruled in favor of SM Entertainment Co. Founder and former Chief Producer Lee Soo-man to block the company from selling new shares and bonds to Kakao Corp., scuppering a deal aimed at making the mobile giant its No. 2 shareholder.

The verdict by the Seoul Eastern District Court comes two days after HYBE failed in a tender offer to increase its ownership of the entertainment powerhouse to 40%, after SM's share price was trading above its bid price of 120,000 won ($92).

The court accepted Founder Lee's claim that the entertainment agency was not in such urgent need of fresh capital to need to issue new shares and bonds to be bought by Kakao Entertainment Corp.

On Feb. 7, SM announced that it would sell 220 billion won worth of new shares and bonds convertible into equities to Kakao to form a strategic partnership. The deal was supposed to close on March 6.

To challenge the deal, Founder Lee filed an injunction with the district court. Simultaneously, he sold most of his shares in SM to HYBE Co., the label behind the global sensation BTS, for 422.8 billion won.

Currently, HYBE holds a 15.8% stake in SM, including the 14.8% stake it bought from Founder Lee last week. It is set to buy an additional 3.65% stake from Lee.

Friday's court ruling seems to give HYBE the upper hand in the battle for SM, after it lost the first battle against Kakao with the failed tender offer.

Market sources said that a couple of unknown investors recently bought up SM shares and lifted its share price last month. They speculated Kakao might be behind these share purchases.

After the court ruling, their top priority would be on winning over other shareholders to control SM’s board. HYBE plans to replace all directors on SM’s board with its candidates.

WHAT’S NEXT?

Kakao could launch its own takeover bid for SM and secure a larger stake than HYBE’s to become the largest shareholder.

But industry watchers said Kakao would not be able to continue to buy SM shares, given the estimated costs.

To secure as much as 40% of SM as planned by HYBE in a tender offer, Kakao may need to spend between 1.2 trillion and 1.4 trillion won. The estimation is based on the projected offer price of 130,000 to 150,000 won.

Founder Lee has recently been locking horns with SM’s top management.

In January, its co-CEOs Lee Sung-soo and Tak Young-jun turned their backs on Lee and shifted their allegiance to local activist fund Align Partners Capital Management, which had criticized SM’s unfair business practices with Founder Lee’s private companies.  

Their disputes then evolved into a battle between SM-backed Kakao and HYBE Co. supported by Founder Lee.

Write to Jun-Ho Cha and Ji-Eun Ha at chacha@hankyung.com

Yeonhee Kim edited this article.