HYBE withdraws bid for SM in $1 bn battle with Kakao

South Korea's HYBE Co., the company behind the global sensation BTS, said on Sunday it has decided to pull out of the face-off with Kakao Corp. for control of SM Entertainment Co., ending a month-long battle for the K-pop pioneer with an estimated $1 billion price tag.

The decision was made after it reached an agreement with the mobile giant Kakao, under which the two sides would cooperate to boost their platform business, it said without elaborating.

“The (stock) market was showing signs of overheating due to our competition with Kakao," HYBE said in a statement. “We concluded that it could have a negative impact on our share value.”

It noted that Kakao’s counter tender offer, announced last week, has driven SM's share price above the level it could afford for a renewed takeover bid.

HYBE and Kakao are now working on the details of their agreement, which will not touch on HYBE’s current 15.78% stake in SM.

The labels behind girl groups NewJeans and Le Sserafim opened the discussion with Kakao on March 10, less than a week after Kakao made a 1.25-trillion-won ($950 million) tender offer for SM, according to people with knowledge of the matter.

Its bid price of 150,000 won per share is 25% higher than that of HYBE, which failed in its own tender offer after SM shares were trading above the offer price.

On Friday, shares in SM dropped 4.58% to close at 147,800 won.

As part of the deal under negotiations, they also have agreed not to go up against each other at SM's shareholder meeting on March 31.

Each of them may hold a similar level of SM shares and take half of SM’s board seats, the sources said. HYBE earlier wanted to replace all of the incumbent, Kakao-friendly board members with its candidates.

Separate from the talks, Kakao will continue to buy SM shares in a tender offer, which is set to expire on March 26.

If the takeover bid was successful, it will boost its ownership to 40% of SM, including the 4.91% it recently bought in the market.

HYBE'S EXIT?

HYBE, led by famed music producer Bang Si-hyuk, is set to buy an additional 3.65% from SM Founder Lee Soo-Man, which will increase its shareholding in SM to 19.43%.

For its possible exit, HYBE seems to leave the door open to selling all its SM shares to Kakao. 

Alternatively, it may wait until Kakao Entertainment Co. completes its merger with SM and the merged entity goes public to dispose of its SM shares, the sources said.

Kakao had locked horns with HYBE since early February, after the music powerhouse sought to challenge the former's bid to grab SM.

Until recently, there seemed to be no signs of the two companies resolving their dispute. But as industry observers warned of the winner's curse, they have changed course to reach a settlement. 

SM, founded in 1995, is expected to give momentum to its new owner for global expansion and portfolio diversification, as well as boost its platform business. 

It boasts a vast portfolio of intellectual property of its artists, as the agency of first- and second-generation Korean idols such as H.O.T., S.E.S., SuperJunior and Girls' Generation, as well as singer BoA.

With the competition intensifying to secure management rights over SM, 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.

In response, HYBE was seeking to raise about 1 trillion won, which stoked market speculation it might make a higher counteroffer.

Such speculation drove SM’s share price to a record-high 161,200 won at one point on March 8, above Kakao’s bid price of 150,000 won.

But after SM shares fell slightly below the price, HYBE decided to meet Kakao at the negotiating table, according to the sources.

For Kakao, it might be better to end its dispute with the renowned music production company as it is under regulatory scrutiny over its heavy share purchase of SM shares during HYBE’s tender offer period.

It is alleged to have bought up SM shares to manipulate SM’s share price and thus block HYBE’s takeover attempt.

(Updated with HYBE's announcement and other details)

Write to Jun-Ho Cha and Dong-Hun Lee at chacha@hankyung.com

Yeonhee Kim edited this article