[SM Management Battle] Did Kakao Also Fail in the Tender Offer? ... What Is HYBE's Next Move?

SM Stock Soars, Kakao's Tender Offer Surpasses 180,000 Won... Speculation of Rival Tender Offer and Possible Awkward Coexistence Situation

The stock price of SM Entertainment (SM) has surpassed the public tender offer price of 150,000 KRW proposed by Kakao. The surge in stock price is interpreted as a result of growing expectations that HYBE will conduct a 'counter public tender offer.' With the soaring stock price, the possibility of Kakao's public tender offer failing, following HYBE's, has increased significantly.

As of the closing price on the 8th, SM's stock price rose by 8,800 KRW (5.88%) from the previous day to 158,500 KRW. During the trading session, it exceeded not only Kakao's public tender offer price of 150,000 KRW but also the 160,000 KRW mark. In the securities industry, it is already seen as a 'war of money' driven by pride beyond the intrinsic value of the company, leading to speculation that HYBE might reveal a hidden card right after Kakao's public tender offer period ends and before the shareholders' meeting is held. It is expected that Kakao will attempt a last-minute turnaround with the maximum bet, unable to conduct an additional public tender offer. Kim Hyun-yong, a researcher at Hyundai Motor Securities, explained, "Both Kakao and HYBE can consider a price-to-earnings ratio (PER) of up to 50 times," adding, "This is why there are talks that HYBE might attempt a public tender offer at 180,000 KRW." He further stated, "If HYBE makes any position announcement or concrete action, it is likely to be just before the shareholders' meeting."

Waiting Until Kakao's Public Tender Offer Ends?

According to estimates by Hyundai Motor Securities, HYBE can currently mobilize about 1 trillion KRW without external funding. This amount is sufficient to acquire an additional 25% stake in SM at a public tender offer price of 180,000 KRW per share. HYBE is reportedly considering borrowing approximately 300 billion KRW in acquisition funds through major domestic securities firms. The funds allocated for the acquisition have increased by 50% compared to when the public tender offer price was announced at 120,000 KRW per share. While this price might be excessive when considering SM's intrinsic value, it is difficult to back down as the situation has turned into a 'war of money.' According to Hyundai Motor Securities, considering HYBE's cash assets as of the end of September last year, fourth-quarter operating cash flow, and first-quarter new borrowings, HYBE's funding capacity is estimated at around 1.9 trillion KRW. After deducting about 300 billion KRW for acquiring a U.S. hip-hop label, approximately 1.6 trillion KRW remains. Previously, HYBE spent about 450 billion KRW to secure shares in SM.

It is premature to conclude that Kakao's public tender offer will fail. The public tender offer period lasts until the 26th of this month, so there is ample time. HYBE has acquired about 1% additional shares through a public tender offer at 120,000 KRW per share. Kakao, which already holds 4.9% of SM shares, is also expected to gather more shares through the public tender offer. From the perspective of investors who have achieved their target returns, if the stock price falls below 150,000 KRW again amid uncertainty about HYBE's additional public tender offer, they might respond to Kakao's public tender offer. However, activist fund Align Partners Asset Management has stated that while it supports Kakao's public tender offer, it will not participate.

Currently, HYBE holds 15.78% of SM shares, combining the 0.98% acquired through the public tender offer and the 14.8% secured from former SM Chief Producer Lee Soo-man. Including the remaining 3.65% shares expected to be disposed of through a put option exercised by Lee against HYBE, the total stake amounts to 19.43%. If Kakao fails to gather its target of approximately 35% in this public tender offer, a precarious coexistence could continue for a certain period, where neither Kakao nor HYBE gains control.