HYBE barely ups SM stake in tender offer amid tensions with Kakao

HYBE Co. has raised its stake in the K-pop pioneer SM Entertainment Co. by merely 0.98% in a tender offer, after just one institution and minority investors with four SM shares accepted the bid, according to their filings on Monday.

The stake increase fell far short of its plan to buy a stake of up to 25% of the renowned producer of Korean idols, in addition to the 14.8% it had purchased from SM Founder and top shareholder Lee Soo-man last month.

But it had been widely expected that HYBE would fail to secure management rights over SM in the tender offer after the latter’s share price was trading above its bid price of 120,000 won.

Further, the fact that the National Pension Service, a major shareholder, opted to sell half of its SM shares in the market last month, instead of accepting the tender offer, raised the specter of failure for the tender offer.

Galaxia SM Inc., a sports marketing arm of South Korea’s Hyosung Group, was the only institutional investor that agreed to sell SM shares at the offer price to the company that owns the BTS label.

Currently, HYBE holds a 15.78% stake in SM, the agency behind the girl group aespa and boy band NCT, as the largest shareholder.

HYBE is set to buy an additional 3.65% from SM Founder Lee, which will increase its ownership of SM to 19.43%.

The regulatory filings followed a court decision last Friday that blocked SM from selling a 9.05% stake to Kakao through new share and bond issues, a deal that could make the mobile giant its No. 2 shareholder.

The ruling appears to have given HYBE the upper hand in the escalating fight against Kakao for control of the entertainment titan.

But its stake in SM as the largest shareholder is no guarantee that it can engage in SM’s management. To exercise its clout over the entertainment giant, it needs to gather support from minor shareholders, accounting for more than 60% of SM’s outstanding shares, for its proposal to replace all directors on SM’s board with its candidates.

After the failed tender offer, the company that owns the label behind girl groups NewJeans and Le Sserafim is understood to prepare to buy additional SM shares from institutional investors in block trades, while asking them to vote in favor of HYBE at the March 31 general meeting.

To do so, it is seeking to raise up to 1 trillion won ($770 million) from domestic and foreign entertainment companies, as well as from financial investors, according to sources familiar with the matter on Sunday.

The fundraising size would be as much as the 1.2 billion won Kakao has secured in pre-IPO funds from Saudi Arabia’s Public Investment Fund (PIF) and Singapore’s sovereign wealth fund GIC last month.

The fundraising plan comes amid market speculation that Kakao could launch its own takeover bid for SM to secure a larger stake than HYBE’s to become SM’s largest shareholder.

Before Friday’s court ruling against the alliance between Kakao and SM’s top management, Kakao had pledged to mobilize all possible measures to thwart HYBE’s scheme to gain control of SM, irrespective of a court ruling.

For its part, SM has been ratcheting up pressure on HYBE to block it from raising its stake.

On Monday, it warned HYBE against possible block deals to buy up SM shares, which it said might violate Korean commercial law.

“We were tipped off about HYBE’s attempt to buy our shares in block deals,” SM said in a statement. “If that proved true, we will take stern action against them to minimize the negative impact on SM shareholders.”

The following is a timeline of the ongoing saga surrounding SM:

Jan. 15: Align Partners filed proxy litigation against SM Founder Lee Soo-man and seven former board members on allegedly unfair business practices between SM and Lee’s private companies.

Jan. 20: SM’s top management, led by Co-CEOs Lee Sung-soo and Tak Young-jun, announced that it would accept all of Align Partners’ corporate governance reform demands.

Feb. 7: Kakao agreed to buy a 9.05% stake in SM through new shares and convertible bonds for 220 billion won to form a strategic partnership. The deal was supposed to close on March 6.

Feb. 8: Founder Lee filed an injunction with a Seoul district court to stop SM from issuing shares and convertible bonds that would be bought by Kakao.

Feb. 10: HYBE agreed to buy a 14.8% stake in SM from its Founder and top shareholder Lee and announced a tender offer to secure an additional 25% stake in SM by March 1.

Feb. 16: SM was said to put its cash cows up for sale – management agency KeyEast Co. and movie and drama production studio SM C&C Co. It dropped the online fan community operator DearU Co. from the sale list.

On the same day, SM co-CEO Lee Sung-soo, a nephew of Lee’s deceased wife, created a YouTube channel and disclosed allegedly behind-the-scenes global business contracts between the entertainment giant and Lee’s Hong Kong-based private company.

Feb. 19: HYBE said it won’t raise its offer price for SM above its bid price of 120,000 won.

Feb. 22: HYBE completed the 422.8 billion won share purchase of a 14.8% stake in SM from Lee.

Feb 23: 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.

Feb. 27: Kakao said it would mobilize all possible countermeasures against HYBE’s attempt to increase ownership of SM through a tender offer. 

Feb. 28: HYBE failed in a tender offer to buy up to a 25% stake from minority shareholders.

March 3: The Seoul Eastern District Court accepted Founder Lee’s claim that SM does not need to raise fresh capital from Kakao and said the deal with Kakao could be seen as an attempt to undermine Founder Lee's control over SM.

March 5: HYBE is understood to have tapped entertainment companies and financial institutions to raise up to 1 trillion won.

March 6: Kakao decided to launch a takeover bid for SM at 150,000 won, 25% above HYBE's bid price.

UPCOMING EVENTS

March 31: SM general shareholders' meeting where HYBE is seeking to replace all SM board members with its candidates.

HYBE is set to buy the remaining 3.65% stake in SM from Founder Lee after its merger with SM is completed, or within a year after the deal closes.

(Updated to add Kakao's decision to make a tender offer for SM)

Write to Ji-Eun Ha at hazzys@hankyung.com

Yeonhee Kim edited this article