SM Entertainment Cancels Kakao Share Issuance, Doubles Down on Hybe Pushback Ahead of Shareholder Meeting

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Seoul, South Korea. Photo Credit: Ciaran O’Brien

Late last week, a South Korean court barred SM Entertainment from issuing more shares amid an ownership battle with Hybe. Now, SM has officially nixed a related agreement with Kakao Entertainment, and Hybe has increased its interest in SM.

These newest developments in the multifaceted showdown between Hybe (KRX: 352820) and SM (KRX: 041510) just recently came to light in regional reports as well as releases from the involved businesses. For background, the BTS agency last month purchased 14.8 percent of SM from founder (and previous chief producer) Lee Soo-man and emphasized ambitious global-expansion plans.

But SM promptly pushed back against the investment and Hybe’s ultimate objective of securing a 40 percent controlling stake. On top of spearheading a public campaign against the “hostile takeover,” SM execs unveiled a deal to sell around nine percent of their business (and establish a stateside joint venture) with the entertainment division of Kakao (KRX: 035720).

Lee Soo-man (who’s said to have made north of $320 million by selling to Hybe) then took aim at the agreement in court, claiming, among other things, that SM would use the pact to dilute existing shareholders’ respective interests. Meanwhile, the Supertone owner Hybe isn’t shying away from criticizing SM higher-ups – or hesitating to try and replace the entity’s board.

As initially noted, a judge last week “granted a provisional injunction to prohibit the issuance of new shares and convertible bonds in SM Entertainment,” Hybe confirmed in a release.

Building upon the latter, SM has formally “rescinded a contract to issue new shares and convertible bonds” to Kakao, according to the Korea Times. The same outlet reported that Hybe now possesses around one-fifth of SM.

However, Reuters today placed the Quality Control parent’s SM ownership at 15.78 percent, indicating that a regulatory document had revealed a tender-offer deal for another 0.98 percent of the business. According to reports, Hybe had initially intended to obtain as much as an additional 25 percent of SM with a tender offer.

In any event, Hybe (which has gone ahead and launched a comprehensive “SM with Hybe” campaign and website) has penned a letter and an associated release calling for several “follow-up actions” from SM on the heels of the injunction.

Specifically, SM should block “all actions that are contrary to the provisional injunction decision,” nix the above-described “business cooperation agreement signed with Kakao,” and withdraw the nomination for Kakao’s recommended board candidate.

(Hybe is working to add its own execs to the same board, as mentioned, and a general meeting of SM shareholders is scheduled for March 31st. Hybe debuted a voluminous general-meeting presentation, complete with suggested board appointees, last week, and SM has now done the same.)

“The company requested SM’s statement on the position of the SM Board and individual directors, and its plan by March 9,” Hybe disclosed of its quick-approaching response deadline for SM.

Though it’s unclear whether Hybe has yet received an official follow-up from SM, the company behind Onew and Lim Kim has also rolled out a campaign (entitled “Save SM 3.0”) and website in support of its position. (Around the time that Hybe’s buyout plans entered the media spotlight, SM detailed a seemingly far-reaching expansion initiative called SM 3.0.)

And Save SM 3.0, like the counterpart campaign from Hybe, is equipped with a press section. SM today published four separate releases therein, maintaining in one of the documents that South Korea’s Capital Markets Act prohibits Hybe from executing a block trade for six months following the aforesaid tender offer.

Finally, the other resources posted by SM explore at length the perceived advantages of pursuing growth under SM 3.0 as opposed to selling to Hybe, which would allegedly leverage SM’s resources to benefit its (Hybe’s) existing roster and bottom line.