HYBE to raise up to $769 mn, new twist on battle with Kakao for SM

HYBE Co. is tightening the reins in its fight against Kakao Corp. for control of SM Entertainment Co. by raising up to 1 trillion won ($768.6 million) from investors as it looks to seize an opening following last week’s court’s decision to block SM’s planned share sale to Kakao.

According to sources in the investment banking industry on Sunday, HYBE is tapping global strategic and financial investors to raise capital in a new share sale deal led by Morgan Stanley.

The size of the fundraising has not been disclosed but the company behind the labels for BTS and NewJeans is said to be seeking to secure up to 1 trillion won, which is between 10% and 15% of its market capitalization estimated at 7.7 trillion won based on its closing price Friday, according to sources.

HYBE Founder and Chairman Bang Si-hyuk holds the largest stake of 31.8% in HYBE, followed by Netmarble Corp. with 18.2%.

This is as big as what KaKao Entertainment Corp. has been promised to receive from Saudi Arabia’s Public Investment Fund (PIF) and Singapore’s sovereign wealth fund GIC early this year. PIF and GIC on Jan. 11 signed a deal to inject 600 billion won, each, into the entertainment management unit of Kakao.

The fresh ammunition is expected to embolden HYBE in its battle against Kakao to take control of SM Entertainment.

After its tender offer for the K-pop pioneer failed, HYBE is expected to use the new funds to up its SM stake to beat KaKao, which has no intention to back down from its fight, either. 

BLOCK TRADE VS NEW TENDER OFFER

HYBE plans to hold a non-deal roadshow (NDR) for local institutional investors holding SM shares from March 6 to 9. During the NDR, HYBE is expected to request institutional investors to sell their SM shares in block trades and request them to back HYBE at SM Entertainment’s general shareholders’ meeting later this month.

HYBE may attempt to secure more SM shares through an additional tender offer because a direct block trade with an institutional investor could violate the country’s capital market laws. Currently, a firm seeking to buy 5% or more shares of a listed firm via block trades from 10 or more shareholders of the latter in a six-month period must purchase the shares in a tender offer.

This means that HYBE should acquire extra SM shares in the market or another tender offer if it wishes to own more SM shares in the next six months.

The management firm for the world’s top boy band on Feb. 10 unveiled a plan to control a 40% stake in another K-pop titan SM through a tender offer to buy up to 25% from minority shareholders at the price by March 1 to take over SM.

Currently, HYBE owns a 15.8% stake in SM, including the 14.8% stake it bought from SM Founder and top shareholder Lee Soo-man. It is set to buy an additional 3.65% stake from Lee.

But SM stock ended at 127,600 won on Feb. 28, the last day of HYBE’s offer period, higher than its bid price of 120,000 won per share, leading HYBE to fail to purchase SM shares in the tender offer. March 1 was a Korean public holiday.

Combined with 422.9 billion won it paid to Lee for his 14.8% stake, Korea’s largest market-cap entertainment company has already spent more than 1 trillion won in SM share purchases including the failed tender offer.

Given the fact that it also spent 314 billion won on buying a 100% stake in North America’s largest hip-hop label holder QC Media Holdings in February, HYBE must have nearly used up its 903 billion won worth of cash and cash equivalent assets as of the third quarter of last year.

Its short-term debt has also piled up to 440 billion won after it borrowed 320 from its affiliate to acquire SM shares.

With the fresh funds, HYBE is also expected to lighten its growing financial burden. 

NEED COLLABORATION TO KEEP K-POP SENSATION GOING

To HYBE Chairman Bang Si-hyuk, however, the most urgent issue is to revive the K-pop sensation through its tie-up with the K-pop pioneer.

In his interview with CNN on Friday, Bang raised his concern that K-pop music could eventually lose steam.

“That is my major concern. In fact, looking at our export indicators and streaming growth, the slowdown in growth is very clear,” Bang was quoted as saying in the CNN interview, noting that K-pop music still makes up a slim slice of the global music market.

“Globally it (K-pop) is not occupying much of the market … So being where we are, it is more urgent to increase the exposure,” said Bang.

The HYBE-SM should help improve K-pop's reputation in the global market, Bang said, denying the accusation of its hostile takeover attempt of SM to monopolize the country’s entire entertainment industry.

“It wouldn’t be correct to say that we’re trying to take over the whole industry,” said Bang.

The new fundraising attempt signals HYBE’s more aggressive M&A activities to further its position in the global music industry.

HYBE has taken over a string of foreign music labels and entertainment management companies including Ithaca Holdings, which manages global artists Ariana Grande and Justine Bieber in 2021, and Quality Control, a US hip-hop label behind popular artists Migos and Lil Yachty.

If SM joins it, HYBE would control nine labels including BIGHIT behind BTS and ADOR for NewJeans under its wings. SM manages aespa, NCT, EXO, Super Junior and Girls' Generation.

HURDLES

The key to its successful fundraising is, however, approval from existing shareholders who could be concerned about possible share dilution following the new share sale.

It is also said that HYBE has decided to sell new shares to private equity firms after it had failed to invite offshore entertainment companies to join it in the expedition as strategic investors.

Kakao has not given up its bid for SM, either. It is expected to come up with new plans.

HYBE has the upper hand for now after the Seoul Eastern District Court on Friday ruled in favor of SM former Chief Producer Lee to block the company from selling 220 billion won worth of new SM shares and bonds convertible into equities to Kakao to form a strategic partnership, which could make Kakao the second biggest shareholder in SM.

Now all eyes are on whether Kakao could launch its own takeover bid for SM, which could cost it up to 1.4 trillion won if it wants to secure as much as 40% of SM as planned by HYBE in its previous tender offer.

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

Sookyung Seo edited this article.