Will SM shares’ bull run foil Kakao’s takeover attempt?

The bull run in shares of SM Entertainment Co. may deal a heavy blow to Kakao Corp. ’s 1.25-trillion-won ($950 million) takeover bid for the K-pop pioneer, for which the mobile giant has been stepping up its fight against BTS label HYBE Co.

SM’s share price has continued to break record highs since last month and has doubled year-to-date.

It has already topped Kakao’s bid price of 150,000 won ($114) as market speculation grew that HYBE, the agency behind girl group NewJeans, might make a higher counteroffer.

On Wednesday, shares in SM rallied to their record high, reaching an intra-day high of 161,200 won, buoyed by Kakao’s announcement on Tuesday that it would launch a tender offer for SM to buy 35% of the latter.

If Kakao, South Korea’s dominant mobile platform, succeeds in the tender offer, it will secure as much as 40% of SM, including the 4.91% it recently bought in the market.

The upward spiral in SM shares is unlikely to force Kakao to back off.

Kakao may have to bump up its offer price to win the ongoing battle for the producer of first- and second-generation Korean idols such as H.O.T., S.E.S. SuperJunior and Girls’ Generation.

SM is seen as Kakao’s silver bullet to grow its entertainment arm as a global player as Kakao Entertainment Co. is preparing to go public on the Nasdaq in the US, market watchers said.

To fund its planned acquisition of SM, which manages the girl group aespa and boy band NCT, Kakao raised 1.2 trillion won in fresh funds from Saudi Arabia’s Public Investment Fund (PIF) and Singapore’s sovereign wealth fund GIC last month.

The pre-IPO fund came with undisclosed conditions attached, according to people with knowledge of the matter, including an IPO within the next few years.

To that end, Kakao is said to be considering various options, including listing via a special purpose acquisition company.

For the fundraising, it was valued at 10 trillion won, about half its previous valuation.

A string of acquisitions over the past years has undermined Kakao's bottom line. Except for the Melon music streaming service, it has accumulated losses from other businesses such as webtoons and web novels.

SM’s vast portfolio of intellectual property, supported by its artists’ global population, would be the final puzzle piece to perfect Kakao’s business, as well as its global expansion.

“In the US, platform companies’ valuations depend on how attractive their intellectual property is, rather than their platform business itself,” said a global investment bank official.

“If Kakao loses the chance to buy SM Entertainment, there is no doubt its IPO plan will falter.”

A failure in the IPO could also lead to the departure of core employees. It has granted stock options to key staff of companies it took over to retain the personnel.

They may be able to set up their own companies after the four-to-five-year ban begins to be lifted from the end of this year, under which they are not allowed to engage in similar businesses.

WHATEVER IT COSTS

Kakao Founder Kim Beom-soo, also known as Brian Kim, is said to be determined to clinch the SM deal, which is being spearheaded by Kakao Chief Investment Officer Bae Jae-hyun.

“Bae is known as a person of action, rather than a strategist,” one of the sources told Market Insight, the capital market news outlet of The Korea Economic Daily.

“The fact that he is spearheading the deal shows Kakao's determination to push ahead whatever it costs,” he said.

Kakao is speculated to be behind HYBE’s failed tender offer last week to increase its ownership of SM to 40%.

During the tender offer period, Kakao was understood to buy up SM shares in the market and lifted the latter’s share price above HYBE’s offer price of 120,000 won.

FRESH AMMUNITION FOR HYBE

To counter Kakao, HYBE is seeking to raise about 1 trillion won, which is expected to finance its purchase of additional SM shares.

It is now SM's largest shareholder with a 15.78% stake.

HYBE is also understood to be tapping brokerage companies to secure several hundreds of millions of dollars in additional money. Such fundraising plans reinforce market expectations that it might make a higher counteroffer for SM.

Some market watchers said HYBE could mimic what Kakao was believed to do: buying up SM shares a few days before the tender offer expires.

But HYBE could find it difficult to buy SM shares aggressively in the market. Under the current laws, the largest shareholder in a listed company must disclose additional share purchases in the company.

Alternatively, HYBE may buy additional SM shares in block deals, or mobilize support from other institutional investors to exercise its clout over the latter, ahead of SM’s general meeting on March 31.

Meanwhile, the regulatory Financial Supervisory Service has embarked on a probe into whether massive share purchases of SM by unidentified institutions during HYBE’s tender offer period were aimed at manipulating its share price.

Shares in HYBE closed down almost 6% at 177,200 won, while Kakao shed nearly 4% to finish at 59,100 won on Wednesday.

Write to Dong-hun Lee and Jun-ho Cha at leedh@hankyung.com

Yeonhee Kim edited this article.