[SM Management Dispute] Kakao and HYBE Laugh While Retail Investors Frown?

Concerns Over the 'Winner's Curse' Lead Kakao and HYBE to Each Make Concessions
Individuals Who Bought SM Shares at High Prices May Face Losses

Kakao has concluded the SM Entertainment (SM) management rights battle on the condition that it holds the management rights while HYBE collaborates in the platform business. This comes about a month after Kakao announced on the 7th of last month that it would enter into a business cooperation agreement with SM and planned to acquire approximately 9% of its shares. As the acquisition price for management rights soared during the tender offer dispute, HYBE, judging that an excessive bet would yield no practical benefit, withdrew first.

Kakao Spending About 500 Billion Won More Than Initially Planned

Kakao is conducting a tender offer to acquire 35% (8,333,641 shares) of SM's shares at 150,000 won per share, totaling 1.25 trillion won, until the 26th of this month. This is about 60% higher than the acquisition amount Kakao initially planned. Previously, SM planned to secure about 9% of SM shares at around 90,000 won per share. By securing SM shares at the final price of 150,000 won instead of the 90,000 won level, Kakao effectively spent an additional 500 billion won. Including the cost of purchasing about 5% of the shares on the open market, the total M&A cost amounts to approximately 1.3 trillion won.

On the other hand, HYBE can earn a profit exceeding 100 billion won if it successfully sells its SM shares. HYBE purchased 14.8% (3,523,420 shares) of SM shares from Lee Soo-man, the largest shareholder of SM, at 120,000 won per share. By the 28th of last month, HYBE also secured transfer shares (233,813 shares) from Galaxia SM, an affiliate of the Hyosung Group, through a tender offer at 120,000 won per share. Assuming HYBE responds to Kakao's tender offer at 150,000 won per share with the 3,757,233 shares acquired this way, a simple profit of about 112.8 billion won would be generated.

Retail Investors Who Bought SM Shares Above 150,000 Won...

Attention is also focused on the direction of SM's stock price. The prevailing view is that SM's stock price will undergo a correction after Kakao's tender offer. As of 9:28 AM on the 13th, SM's stock price on the KOSDAQ market recorded 123,400 won, down 16.58% from the previous trading day. Looking at the stock price trend over the past year, it rose from the lowest point of 57,500 won in May last year to the highest point of 161,200 won in March this year. The stock price, which overheated due to the management rights dispute, is expected to undergo a correction as Kakao effectively wins.

In the securities industry, Kakao's tender offer price of 150,000 won is close to a price-earnings ratio (PER) of 40 times for SM, and after the management rights dispute ends, it is expected to stabilize downward around a PER of 35 times, reflecting improvements in governance and corporate value enhancement. Kim Hyun-yong, a researcher at Hyundai Motor Securities, said, "Once the stock price stabilizes to some extent, we expect it to be around a PER of 35 times." According to financial information provider FnGuide, the consensus fair price for SM is 124,056 won.

Another variable for retail investors is that Kakao's tender offer target is up to 35% of the total shares. Excluding shares held by HYBE, Kakao, and others, the circulating shares account for about 70% of the total shares. The remaining shares exceeding the 35% tender offer announced by Kakao will be processed on a pro-rata basis even if tendered. This means that even if investors want to tender all their shares, they may not be able to do so. Especially, retail investors who bought SM shares above 150,000 won are likely to be disappointed.

The handling of the 15.78% stake acquired by HYBE is also expected to affect SM's stock price. Since HYBE agreed to collaborate on the platform without holding SM's management rights, it is highly likely to retain a certain portion of shares and sell the rest to Kakao.

'SM 3.0' Is a Roadmap for Kakao's Investment Recovery

Lee Chang-hwan, CEO of Align Partners Asset Management, who fired the starting signal for this SM management rights battle, stated, "About 1 trillion won is needed to realize SM 3.0, and to raise this, SM will proceed with the sale of subsidiaries." Following the agreement between Kakao and HYBE, Lee Chang-hwan will serve as an outside director on SM's board after the shareholders' meeting at the end of this month. He explained, "Although it is a matter to be decided by the newly formed board, we are considering selling non-core subsidiaries of SM excluding DearU."

SM plans to accelerate the securitization of assets that have low relevance to its core business and contribute little to profits. The plan is to actively securitize within one year and then invest in a new growth portfolio. SM is expected to drive the sale of non-core subsidiary shares such as SM C&C (29.56%) and KeyEast (28.38%) held through SM Studios.

Regarding the music business, SM plans to pursue domestic and overseas mergers and acquisitions (M&A). Priority is given to U.S. agencies. It is preparing investments of up to 200 billion won and is currently reviewing 3 to 5 companies. Domestically, it is reviewing M&A targets of 5 to 7 companies with a budget of up to 100 billion won. Kakao, which will become the largest shareholder of SM, is expected to seek an indirect exit (investment recovery) through the listing of Kakao Entertainment.

The acquisition of SM shares is also expected to shorten the timeline for Kakao Entertainment's listing. Two years ago, Kakao Entertainment acquired Radish (web novels) and Tapas (webtoons) and began preparing for listing, but the lack of sufficient content to justify corporate value and the sluggish stock market delayed the listing. Kakao Entertainment is more likely to choose a direct listing rather than a backdoor listing through SM to recover early investor funds. It is expected to actively pursue listing as early as the end of this year or early next year.