600 Billion KRW Investment Each from Saudi and Singapore Sovereign Wealth Funds
Reducing Financial Burden and Promoting M&A...SM Entertainment Acquisition Gains Momentum
[Asia Economy Reporter Yuri Choi] Kakao Entertainment has secured an investment of 1.2 trillion KRW. The acquisition of SM Entertainment, which had been stalled due to funding issues, is expected to gain momentum again. Recently, as the management rights sale was reignited due to SM Entertainment's governance issues, there is an analysis that the possibility of SM Entertainment coming under Kakao Entertainment's umbrella has increased.
On the 12th, Kakao Entertainment announced that it had attracted an investment of 1.2 trillion KRW from sovereign wealth funds in countries such as Saudi Arabia and Singapore. This was done by subscribing to new shares issued through a third-party allotment paid-in capital increase.
The purpose of the fundraising was disclosed as acquisition of other companies (600 billion KRW) and securing operating funds (600 billion KRW). This aims to reduce the financial burden that has grown due to aggressive M&A while pursuing additional acquisitions. Over the past two years, Kakao Entertainment has spent more than 800 billion KRW acquiring North American webtoon and web novel platforms such as Tapas and Radish.
Industry insiders expect Kakao Entertainment to accelerate the acquisition of SM Entertainment with the investment funds. Discussions on the acquisition between the two companies began in 2021 but failed to conclude due to differences in views on the share value. Kakao Entertainment lacked the financial capacity to cover SM Entertainment's valuation.
However, the situation has changed. In 2021, Kakao Entertainment held about 240 billion KRW in cash and cash equivalents but has now secured additional funds. Even after repaying short-term borrowings of 870 billion KRW, there is financial leeway. The acquisition price for SM Entertainment's management rights is estimated to be around 500 to 600 billion KRW. This includes the share value of Lee Soo-man, the largest shareholder and chief producer, valued at 350 billion KRW, plus a management premium.
The timing also aligns. Chief producer Lee has stepped away from producing at SM Entertainment and only holds a major shareholder position, increasing the likelihood of selling management rights. At the end of last year, Lee terminated his contract early with his personal company Like Planning. Through Like Planning, he received a certain percentage of SM Entertainment's sales as producing fees, but the contract ended amid controversy over preferential treatment. The contract termination combined with Kakao Entertainment's investment attraction has added weight to the SM Entertainment acquisition.
Furthermore, since Kakao Entertainment lowered the corporate valuation to attract investment, it is analyzed that they have shown a strong intention to acquire. Last year, they pursued investment based on a corporate valuation of 20 trillion KRW but failed; this time, they lowered it to 11 trillion KRW.
An industry official said, "As shareholder activism continues at SM Entertainment, the possibility of the largest shareholder selling shares has increased," adding, "There are ongoing speculations that acquiring SM Entertainment could lead to a backdoor listing amid controversies such as splitting subsidiaries for listing."
The expected benefits of acquiring SM Entertainment are clear. It would not only establish Kakao Entertainment as a leading domestic entertainment company but also secure content necessary for overseas expansion. Kakao Entertainment has subsidiaries including drama and film production companies, entertainment agencies, music production companies, performance planning companies, and webtoon, web novel, and music platforms. If SM Entertainment is added, it will be possible to produce and export various content including K-pop. They are also planning content platforms related to artificial intelligence (AI), augmented reality (AR), and virtual reality (VR), which could create synergy with SM Entertainment's metaverse business. Last year, SM Entertainment established the studio 'Gwangya' and began producing metaverse content.
Kakao Entertainment is also keeping possibilities open. A Kakao Entertainment official said, "The investment funds raised this time will be focused on global business investment," adding, "Nothing has been finalized regarding SM Entertainment, but various possibilities are being considered."
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