As HYBE eyes a $900m stake in K-pop rival, SM Entertainment slams BTS company’s ‘hostile takeover attempt’
The rise of K-Pop has seen its home country of South Korea become one of the most influential markets in the modern hit-making music industry.
There’s a major rift stewing between two of the market’s key players, however, that could have a seismic impact on South Korea’s entertainment business for years to come.
Two weeks ago, HYBE, the company behind BTS, acquired a 14.8% stake in its rival SM Entertainment (behind stars like NCT, EXO and Aespa) from SM’s founder Lee Soo Man, in a deal worth 422.8 billion South Korean won (approx. USD $334.5 million).
As a result, HYBE became SM’s largest shareholder.
It proved to be a particularly acquisitive few days for the K-Pop giant globally, with HYBE America, led by Scooter Braun, agreeing that same week to acquire Atlanta rap powerhouse QC Media Holdings or Quality Control, home to acts such as Lil Baby, Migos, Lil Yachty and City Girls.
As reported by All K-Pop, following its acquisition of Lee Soo Man’s SM Entertainment shares, HYBE revealed in a filing that it intended to up its 14.8% stake in SM to around 40% of the company.
HYBE reportedly planned to do so by purchasing another 25.2% of SM Entertainment’s shares for a total of 1.14 trillion South Korea Won (USD $900 million USD) from minority shareholders, launching a tender offer to do so.
SM Entertainment’s current management, however, is not happy about this possibility.
Over the weekend, Jang Cheol Hyuk, the CFO of SM Entertainment, published a video on YouTube in which he slammed HYBE’s recent takeover bid, arguing that it would lead to the latter company’s monopolization of the K-Pop industry.
He explained in detail why SM Entertainment’s management opposes a takeover by HYBE – noting in particular that he believes HYBE artists will be prioritized over SM Entertainment artists if the firms were to be combined.
Honing in on the competition claims, SM’s CFO says that if HYBE and SM Entertainment were to be combined, “the combined entity would create a monopoly by taking 66% of the total [Korean music] market revenue”.
He added that as of Q3 2022, the two companies’ combined profits derived from both albums and digital music “account for 70% of the [domestic] market”.
Said SM’s Jang Cheol Hyuk: “A lot of indicators of market share imply that HYBE’s acquisition of SM will undermine fair competition, which clearly shows that this acquisition is unfair.”
“The monopoly created as a result of HYBE’s hostile acquisition of SM will cause more diverse and direct problems, including decreased diversity of artists, music and concerts.”
Jang Cheol hyuk, SM Entertainment
Elsewhere in the video, Jang Cheol Hyuk argued that HYBE’s tender offer to acquire an approximate 40% stake in SM Entertainment is “clearly a hostile takeover attempt that has not been consulted with the current management and board”.
He added: “Through this attempt for hostile takeover, HYBE seems to plan to exercise the management control by dominating the board of directors.”
He added that “HYBE has taken advantage of its position in the K-pop market to almost double the concert ticket prices as reported in the news several times recently”.
Jang Cheol Hyuk continued: “HYBE is raising not only its own concert ticket prices but also those of the labels it has acquired, which illustrates the impact monopoly will have on the industry. The consolidation of SM and HYBE will accelerate ticket price increases, adding burden to fans who love and support K-pop and K-pop artists. Concert ticket price hike[s[ is just one example.
“The monopoly created as a result of HYBE’s hostile acquisition of SM will cause more diverse and direct problems, including decreased diversity of artists, music and concerts.”
Immediately after the news of HYBE’s 14.8% stake purchase in SM was announced a fortnight ago, the latter company issued a statement saying that it “oppose[s] all aggressive outside mergers and acquisitions including HYBE”.
So if SM Entertainment’s management is raising the alarm over the potential of HYBE buying more of its company, why did SM Entertainment’s founder – Lee Soo Man – sell HYBE his shares in the first place?
It’s fair to say that internal corporate tension is brewing between SM Entertainment’s management and its founder.
HYBE’s deal came a few days after we learned that South Korea-based Kakao Corp had acquired its own 9.05% stake in K-Pop giant SM Entertainment, in a deal worth 217.2 billion won ($172.8 million).
Lee Soo Man subsequently said he planned to file a lawsuit against the company following the Kakao deal.
And last week, the co-CEO of SM Entertainment, Lee Sung-soo, issued a statement via YouTube leveling various allegations against (SM founder) Lee Soo Man, ranging from “greed’ to offshore tax avoidance.
Meanwhile, South Korea’s competition regulator, the Korea Fair Trade Commission (KFTC), has been keeping a close eye on HYBE’s intention to acquire more shares in SM Entertainment.
Im Kyeong-hwan, the head of the international M&A division of the competition watchdog, told Reuters last week: “Though there have been acquisition deals involving small and medium-sized entertainment agencies, a deal on this scale is a first for us.”
SM Entertainment generated revenues of 256.4 billion South Korea Won (USD $197.7 million) in the three months to end of December 2022, according to a financial statement published by the firm today (February 20).
That was up 18.2% YoY, according to the filing (see below).
News of Kakao’s investment in SM Entertainment coincided with the announcement that SM Entertainment was planning to establish several production centers and a multi-label system as part of a new growth strategy, dubbed SM 3.0.
Reuters reported that SM was planning to use the funds raised through the initial Kakao deal to fund this new strategy.
SM Entertainment’s CFO said in his statement that the company plans to double down on its SM 3.0 strategy and that further details will be published soon alongside a “new IP monetization model” as well as performance targets.
You can read SM Entertainment’s CFO’s transcribed statement in full (translated to English below)…
Hi, I’m Jang Cheol Hyuk, CFO of SM Entertainment.
On February 3, we SM, took the first step toward our new leap forward for our fans, artists, shareholders and employees, by announcing “SM 3.0 focused on the change to the Multi ‘Production Center, Label’ system.” As soon as SM’s new vision “SM 3.0” was announced, the largest shareholder sold his stake, and a hostile takeover attempt by a competitor started.
This is an attempt that ignores not only the fierce deliberation and efforts of the 600 SM employees who have dreamed of becoming the No.1 entertainment company in the world, but also the values and pride of SM that it has pursued together with the fans and artists. Today, we would like to tell you in detail about SM Entertainment’s position on the current situation.
On February 9, HYBE became SM’s largest shareholder by acquiring 14.8% of SM’s stake held by executive producer Soo-Man Lee, the company’s former largest shareholder. HYBE has also announced that it would ultimately acquire ~40% stake through a tender offer currently underway.
This is clearly a “hostile takeover attempt” that has not been consulted with the current management and board. Through this attempt for hostile takeover, HYBE seems to plan to exercise the management control by dominating the board of directors. We know better than anyone else that under such a governance structure, it is difficult to make decisions that prioritize the value of all SM shareholders, including the remaining 60%.
This is the same as returning to the wrong past of ‘SM for a certain shareholder’, which we have been trying so hard to break free from. HYBE’s CEO said he will ensure independent management of SM, but I can tell you how empty this promise is and how difficult that promise is to keep. HYBE has not made any requests for due diligence material to SM during the M&A disclosure process. According to HYBE’s disclosure on tender offering and purchase of old shares, over 1 trillion won of capital will be infused into this deal.
And HYBE is going to take out a short-term loan to finance this deal. In the case of such large-scale borrowing, it should have been an item for deliberation and voting at HYBE’s BOD, however, it is a mystery how the BOD resolved an item that involves investment of over 1 Tr Won without a due diligence. It is considered a common sense and normal practice in the case of an M&A deal this size to undergo a financial audit or legal due diligence based on the data provided by the target company for merger before any purchasing agreement is signed. In this regard, we think that HYBE’s corporate governance is far from sound or rational.
If HYBE takes over SM, it is inevitable that SM will be subject to such weak governance. I would like to point out some of the issues that could possibly arise if the parent company becomes a business competitor. With the optimal album release time limited to 100 times a year, HYBE is already saturated with artists from its labels. As a result, SM artists will have no choice but to be put on a lower priority. In addition, SM will give up the fan platform business aspired by SM 3.0 and use the HYBE platform. Such a platform will simply increase some licensing revenue but not be properly reflected in the corporate value. As a result, SM will lose a new growth engine by missing out on the data that can help deepen [our] understanding [of] fans. Lastly, new business opportunities that might help SM 3.0 strategy will be highly likely to be allotted to HYBE’s wholly-owned subsidiary.
In addition to the examples mentioned, there must be many issues that cannot be addressed by the flawed governance structure where a competitor becomes SM’s parent company. I am confident that this direction will not be the best for SM Entertainment and its shareholders. Some say that there would be a synergy if SM artists joins HYBE’s Weverse platform. However, as mentioned before, this would simply create additional profits for HYBE without any benefits for SM. Rather, such a move would deprive SM of an opportunity to run its own platform business. HYBE currently has a separate business unit that monetizes IP held by its affiliated labels.
This means HYBE, not SM, would take the initiative in operating the SM-owned IP and SM’s future profits would be subordinate to HYBE. HYBE says it will acquire former executive producer Soo-Man Lee’s stakes in SM Brand Marketing as well as his shares in DREAM MAKER. It insists that this aims at improving SM’s governance structure. However, the client of SM Brand Marketing and DREAM MAKER is in effect limited to SM Entertainment. The value of these two companies was created thanks to SM Entertainment, therefore, the SM shareholders should be entitled to the value of the shares.
In this regard, it is inevitable to interpret HYBE’s purchase of the two companies’ shares as a move to provide additional premium to Soo-Man Lee, ultimately leading to the financial loss of SM shareholders. In addition, while the businesses of these companies are in competition with Weverse, there is no explanation on how the businesses of these companies would be carried out after acquiring the shares held by producer Soo-Man Lee. This only increases the chance of the value of these companies being handed over to HYBE, while having no impact on the improvement of SM’s governance structure. HYBE says it will “create a strong synergy in various business areas by acquiring SM”. However, HYBE has not specified what synergy it is and has not clarified the significance of the acquisition for SM’s shareholders. We urge HYBE to clarify what synergy the acquisition would create for SM and to clearly state whether this would be benefiting the shareholders of HYBE or those of SM. SM and HYBE are the top two, major entertainment agencies that are leading the Korean entertainment market scene.
If the two companies are integrated, the combined entity would create a monopoly by taking 66% of the total market revenue. Furthermore, as of Q3 2022, the two companies’ combined profits from albums/digital music account for 70% of the market. Regarding concert/performance profit, the two companies took up as much as 89%.
As a result of an integration, over 60% of the top-ranking artists by album sales would be under a single company, undermining the diversity of the K-pop market. A lot of indicators of market share imply that HYBE’s acquisition of SM will undermine fair competition, which clearly shows that this acquisition is unfair. In the Korean entertainment market, the artists have put in their highest endeavors while the entertainment agencies have engaged in constructive competition.
This has enabled K-pop to achieve its current global popularity and fandom. However, If HYBE takes the majority of the market share by acquiring SM’s managerial rights, K-pop would lose opportunities for a greater advancement forward. Ultimately, K-pop fans will be the ones that will be most affected by the monopoly. SM puts reasonable prices to concert tickets to allow broader scope of fans to enjoy cultural performances. Meanwhile, HYBE has taken advantage of its position in the K-pop market to almost double the concert ticket prices as reported in the news several times recently. HYBE is raising not only its own concert ticket prices but also those of the labels it has acquired, which illustrates the impact monopoly will have on the industry. The consolidation of SM and HYBE will accelerate ticket price increase, adding burden to fans who love and support K-pop and K-pop artists. The concert ticket price hike is just one example.
The monopoly created as a result of HYBE’s hostile acquisition of SM will cause more diverse and direct problems, including decreased diversity of artists, music and concerts. I have talked about the negative consequences HYBE’s hostile takeover may have on the shareholders, fans and moreover, the K-pop market as a whole.
But in addition to the ‘result’, I would like to talk about the problems found in the process of the hostile takeover. During HYBE’s SM share purchase process, purchase of the shares held by the largest shareholder and the tender offering were planned simultaneously and were announced on the same day. Purchase of the old shares and the tender offering must be considered as the same deal, and it had to go through preliminary examination of the Fair Trade Commission. However, as it did not undergo a preliminary examination, it is problematic. If HYBE secures more than 15% of the shares through purchase of old shares and tender offering on Mar 6th, they need to close the reporting of corporate consolidation by Apr 5th, which is 30 days after the purchase date. This can only be viewed as a pre-calculated plan to secure shares first then have an advantageous position at the SM Shareholder’s Meeting before undergoing the preliminary examination by the Fair Trade Commission. Even if the shares are purchased, the Fair Trade Commission examination will serve as a risk for SM’s future.
If the corporate consolidation is rejected due to the reason of monopoly, a large number of SM shares will be released into the market, leading to a plummeting share price. If a conditional approval for corporate consolidation is granted, there is a possibility that HYBE will reduce the size of the SM, the acquired company’s business, to execute corrective measures prescribed by the Fair Trade Commission. Even if approval is granted, the delay in the examination process will create a setback for SM in executing its business strategy. Voices of most employees who have built SM together are expressing resistance to HYBE’s hostile takeover. According to an anonymous employee survey, 85% of employees oppose SM being absorbed by HYBE. HYBE’s hostile takeover is an act of ignoring the efforts of the employees who are working day and night, and the employees are voicing that they feel “the tradition and history of SM are being denied” and their “pride has collapsed”.
As one of the employees, I am also feeling empty and concerned along with my colleagues, and as CFO, I feel a great sense of responsibility to resolve this situation. We want to be clear again that as in the statement released on February 10th, 25 SM executives, including the CEOs, oppose HYBE’s hostile takeover for the sake of shareholders, fans, the K-pop industry, and employees. Hostile takeover cases that took place against the opinions of the BOD and the company, found in Korea as well as other countries, ended up destroying the business performance of the company and ultimately damaged shareholder value. Even 100% share purchase cases found overseas, showed the same results. SM will continue to oppose hostile takeovers by certain major shareholders/groups whose business interests may adversely affect SM and will do our best to protect shareholder rights by establishing a sound and transparent governance structure.
SM’s 2022 performance will be announced soon. We will be explaining the SM 3.0 business strategy, a new IP monetization model following the previously announced “Multi Production Center/Multi Label” strategy, along with performance targets. Along with the SM 3.0 overseas strategy and investment strategy, we will share the business performance and corporate value goals of all SM affiliates. SM will not only reinforce its existing IP business by implementing SM 3.0 but also identify new growth engines to realize revaluation in the market and return the value to the shareholders to create higher corporate value, which will be settled as a virtuous cycle. I am sure many of you shareholders are trying to decide what to do with the tender offer proposal by HYBE. I think it would be beneficial for our shareholders to not respond to the tender offer. Because the changes that will be brought about by SM 3.0 will be of far greater value to the shareholders.
The share price of SM has already exceeded the tender offer price designated by HYBE, which is 120,000 Won and when SM 3.0 is realized, prices will go up even further. We will provide the details of SM 3.0 to you before the closing date of application for the tender offer. Please defer your decision until after you have heard the details. On a separate note, the strategic partnership with Kakao, which the market is keenly interested in will be disclosed in detail in our next announcement.
At this point in time when we have just taken the first step toward SM 3.0, our executives and employees are dismayed and disheartened by the largest shareholder’s stake sale and competitor’s hostile takeover attempt. This attempt is ignoring all of SM’s hard work and efforts, as well as the values that SM has pursued together with its artists. We are well aware of Soo-Man Lee’s contribution to SM as founder and executive producer. SM’s BOD has made a decision to become the BOD for all its shareholders while protecting the dignity of Soo-Man Lee and SM’s legacy as well as preparing for the new leap for all our shareholders. That is why Soo-Man Lee’s decision came as a bigger shock. The role of our management team is to work for SM employees and artists, as well as for fans and shareholders.
This will not change and should not change under any circumstance. As long as our fans and shareholders believe in us, SM will not stop taking a new leap forward. Please look forward to and pay attention to our next announcement regarding the SM 3.0 strategy which will enhance fan and shareholder value. Thank you.
Music Business Worldwide