Mudfight between HYBE and SM, Key Points to Watch

Soo-man Lee-SM Legal Battle Ongoing
HYBE Also Announces Legal Response... Both Sides Firm on Positions
Stock Price Surpasses 120,000 Won, Tender Offer Faces Difficulties
Efforts Focused on Winning Small Shareholders' Support

Hive's acquisition battle for SM Entertainment (hereafter SM) is turning into a mudslinging fight. Whenever one side releases a statement, the other responds within an hour, intensifying the public opinion war. Hive has also threatened legal action against SM, making the acquisition battle even more complicated. Here, we highlight the key points to watch in the SM acquisition battle.

Lee Soo-man vs. SM Legal Dispute... Hive Also Threatens Legal Action

On the 24th, Hive issued a statement announcing that it would take legal measures regarding the business cooperation contract between SM and Kakao. Hive stated, "The convertible bond acquisition contract signed between SM and Kakao damages shareholder interests," and added, "We will take all necessary civil and criminal legal actions."

Hive's claim is that Kakao has been continuously increasing its stake by exercising preemptive rights to conduct third-party allotment capital increases whenever SM's stock price falls, ultimately aiming to secure management control. This is connected to the ongoing legal dispute involving former SM Chief Producer Lee Soo-man and SM's management.

Lee Soo-man filed an injunction to prohibit Kakao from issuing new shares and convertible bonds to SM. The purpose is to prevent Kakao from acquiring a 9.1% stake in SM through new share and convertible bond issuance to third parties.

The key issue is whether the third-party allotment capital increase was conducted with the intent to influence control in a management rights dispute. It is not easy to determine if the 9.1% stake Kakao plans to acquire is enough to shake SM's control and management rights.

SM counters by stating, "There is no plan to raise funds through new third-party allotment investments." Since the current articles of incorporation have almost reached the limit for new share issuance (remaining limit about 20,000 shares, 0.08%), it is legally impossible to issue additional new shares without amending the articles. In other words, Hive's claim that Kakao can demand additional third-party allotment capital increases from SM and continuously increase its stake is not true.

The two sides are firmly opposed, and the legal battle is expected to be prolonged.

Lee Soo-man, former Chief Producer of SM Entertainment, is heading to his car after delivering the keynote speech at the 'Korea-Mongolia Business Dinner' held on the 14th at the Grand Hyatt Hotel in Seoul.
[Photo by Yonhap News]

SM Stock Surpasses 120,000 Won... Shareholders' Meeting Vote Battle Is Key

Hive planned to secure a 39.8% stake in SM through a public tender offer by the 1st of next month. Adding the 14.8% stake acquired from former Chief Producer Lee Soo-man on the 22nd, Hive aimed to exercise stable management control.

However, the sharp rise in SM's stock price has hindered Hive's plans. SM's stock price, which was below 80,000 won last November, reached 121,000 won as of the 24th. Hive has decided not to raise its tender offer price from 120,000 won. With SM's stock price exceeding 120,000 won, it is uncertain how much additional stake Hive can acquire.

If Hive fails to secure sufficient shares, attention will turn to the SM shareholders' meeting scheduled for the 31st of next month. Hive has publicly requested shareholders to delegate voting rights. Depending on the votes of minority shareholders, SM's management could be largely replaced by Hive-affiliated personnel. SM is countering by raising its stock price through treasury stock purchases and arguing against Hive's hostile M&A.

A Fight with No Winner

Even if one side gains the upper hand, the controversy is expected to continue. If Hive succeeds in acquiring SM, concerns about monopolization arise. As of the third quarter of last year, combining SM and Hive's album and music revenue accounts for 70% of the entire market, and combined concert revenue reaches 89%. These risks may be highlighted during the Fair Trade Commission's upcoming review process.

Kakao may respond to block Hive by launching its own tender offer. On the 27th, Kakao broke its silence and issued its first official statement. Kim Sung-soo, Co-CEO of Kakao Entertainment, said in the statement, "We can no longer just watch the current situation that threatens the very existence of the partnership with SM and fundamentally undermines the mid- to long-term growth direction of the three companies. We plan to actively consider all necessary measures."

The "all necessary measures" mentioned by Kakao include a tender offer. If Kakao proceeds with a tender offer, it will have to offer a higher price than Hive. At this point, Kakao shareholders are likely to raise concerns about rights infringement. The acquisition of SM shares would be conducted by Kakao Entertainment, and since the tender offer price would be high, funds would likely need to be drawn from Kakao itself. Given that shareholder rights infringement concerns have caused difficulties during each subsidiary listing, persuading shareholders is expected to be challenging.