Rift Emerges Between Hybe and Kakao Amid Intensifying Battle for SM Entertainment Control

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Photo Credit: Kakao Entertainment

Days removed from the official close of its over $320 million investment in SM Entertainment – one component of a “hostile takeover” effort, according to the latter business – BTS agency Hybe is battling Kakao Entertainment for control of the company.

This latest development in the multifaceted dispute came to light in reports from regional outlets including the Korea JoongAng Daily. For background, Hybe (KRX: 352820) – which posted strong Q4 2022 revenue growth despite the hiatus of BTS – has in recent weeks made clear its ambitious global expansion plans.

To be sure, the Seoul-headquartered business earlier this month scooped up Quality Control, and its deal for 14.8 percent of SM Entertainment (KRX: 041510) only closed last week, as mentioned. Hybe purchased the SM interest from founder Lee Soo-man and, in doing so, became the largest stakeholder in the company behind Aespa, Girls’ Generation, and others. (Lee Soo-man still possesses a reported 3.65 percent of SM.)

But SM execs promptly took aim at the transaction and Hybe’s overarching goal of securing a controlling 40 percent stake, emphasizing in a lengthy video that the combined company would ultimately have a negative effect on K-pop diehards.

On top of this clear-cut opposition from SM Entertainment higher-ups (and reportedly the company’s approximately 600 employees), Kakao Entertainment has moved to buy a little over nine percent of the business. This transaction is expected to wrap next Monday, March 6th, and predictably, the deal and the Kakao (KRX: 035720) subsidiary’s ongoing attempt to forge deeper ties with SM are eliciting criticism from Hybe.

Specifically, Kakao Entertainment – which pulled down nearly $1 billion in funding last month and set its own sights on a global expansion – has established a U.S. joint venture with SM and will gain “exclusive rights over international distribution” under the pact, per the aforesaid Korea JoongAng Daily.

Meanwhile, Hybe reportedly maintains that the contract favors Kakao by allowing it to purchase newly issued shares before other investors have the opportunity to do so. And the above-noted Lee Soo-man, having pocketed north of $320 million from his partial SM sale to Hybe, has criticized the SM-Kakao deal as “illegal” and challenged the agreement in a South Korean court, according once again to the Korea JoongAng Daily.

Of course, the involved parties have pushed back against one another’s qualms; SM claims that “it’s legally impossible to issue new shares” and dilute existing backers’ ownership by enabling Kakao to increase its holding. Additionally, SM has described as “nonsense” the allegation that it’s permanently granting Kakao exclusive distribution rights.

“It’s nonsense to claim that we’ve turned over the [distribution] rights indefinitely when we haven’t even smoothed out the details yet,” SM communicated in a statement. “Specifics will be discussed later through a separate contract.

“HYBE knows that it’s more profitable to hand over the distribution to a company which can do its job well – HYBE’s been entrusting music distribution to YG through a five-year contract,” the entity continued.

Hybe, on the other hand, went ahead and released lengthy public remarks (in English as well as Korean) defending and elaborating upon its vision for SM and the associated acts. And needless to say, K-pop fanatics on both sides of the issue aren’t hesitating to express their firmly worded opinions on social media.