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SM to absorb music production unit before founder's stake sale

SM Entertainment is smoothing the way for the sale by merging with the unit: Report

Aug 25, 2021 (Gmt+09:00)

SM Entertainment founder and Chief Producer Lee Soo-man
SM Entertainment founder and Chief Producer Lee Soo-man

SM Entertainment Co., a South Korean music powerhouse, will absorb a music production company wholly owned by its founder and chief producer Lee Soo-man who has put his entire 18.72% stake in the pioneering K-pop agency up for sale. 

Soon after taking over its sister company – the Korean name of which translates into "Like Enterprise " – SM Entertainment will sell more than a 20% stake in itself worth 340 billion won ($291 million) at current market prices, Asia Economy reported on Aug. 15.

On top of Lee's 18.72% stake, other unidentified shareholders will be offering a 5% stake, the report added. Lee's ownership in SM is the single largest shareholding in the agency and comes with management rights. 

The report was not immediately confirmed, nor the music production company's official English name.

The combination of the two companies is expected to lift the value of the controlling stake in SM to as much as 750 billion won, with its enterprise value seen to balloon to 4.2 trillion won from the market capitalization of 1.7 trillion won on the Kosdaq junior market, according to the report.

Like Enterprise was valued at about 100 billion won by an accounting firm in 2019 when KB Asset Management Co., an SM shareholder, made a public request for SM to merge with the music production company.

At the time, the Korean asset management firm argued that SM paid more than 10 billion won a year to Lee in consulting fees, without paying dividends to shareholders. But SM had turned down the request.

Lee is said to remain determined to unload his stake in the label behind Red Velvet, Girls' Generation, Shinee, EXO, NCT and BoA, rather than handing it down to his children.

His stake sale will be carried out almost simultaneously with the merger between SM and Like Enterprise, and if the interests of the buyer and the seller are met, the stake deal will be completed within two months, the daily said, citing an unnamed investment banking source.

Red Velvet
Red Velvet


Now that bidders have been narrowed down to CJ ENM Co. and Kakao Entertainment Co., the report said SM founder Lee is leaning toward the media company of South Korea's entertainment-to-food conglomerate.

CJ Group Vice Chairman Miky Lee reportedly has met with SM founder and Chief Producer Lee Soo-man to discuss the stake sale.

For CJ ENM to secure management rights in SM and make it its subsidiary, it is required to acquire at least a 20% stake to comply with domestic fair trade laws. 

SM is an attractive target for CJ ENM, which runs various cable TV channels including music broadcast Mnet, tvN, movie channel OCN, animation channel Tooniverse and home shopping brand CJ OnStyle, as well as OTT platform TVing. CJ Group is also the country's top film producer and distributor.

CJ ENM in June announced a plan to spend 5 trillion won to produce original content over the next five years, with an aim to become the Marvel Studios of Asia.

In comparison, Kakao Corp., the country's dominant mobile messenger app, has been expanding into ride-hailing services, entertainment, games and shopping to fintech and education.

SM, founded in 1989, has introduced systematic casting, training and producing of singers and music, leading the global Korean Wave and K-pop phenomenon. It was renamed SM Entertainment in 1995.

It controls 20% of the domestic entertainment management market, behind market leader HYBE with a 33% share. SM's market capitalization is about one-tenth that of HYBE's. 

In the first half of this year, SM posted 42.9 billion won in operating profit, a sharp increase from 6.5 billion won for the entire year of 2020 on a consolidated basis. It also swung to a net profit of 25 billion won in the January-June period from two consecutive years of net losses in 2019 and 2020.

Its share price climbed to its record-high 75,600 won on Wednesday, before closing up 0.42% at 72,400 won.

Yeonhee Kim edited this article.
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