Is Buying SM Shares Now and Responding to the Tender Offer Still a Profitable Deal?

With the management rights dispute of SM Entertainment (SM) resolved through a sudden agreement between Kakao and HYBE, SM's stock price, which had plummeted 23.48% the previous day, recorded a 0.97% increase to 114,200 won as of 10:58 AM today (14th). This marks a rebound amid a sharp decline of around 1% to mid-1% in both KOSPI and KOSDAQ.

The plunge the day before occurred as the management rights dispute issue, which had been the driving force behind SM's stock price surge over the past month, disappeared. Notably, the stock closed at 113,100 won, lower than Kakao's tender offer price (150,000 won) and HYBE's tender offer price (120,000 won). Concerns that investors might not even break even led to prominent selling by individual investors.

The dilemma for individual investors is expected to continue. Although Kakao has decided to conduct a tender offer at 150,000 won per share until the 26th, the quantity available for tender is limited. Kakao plans to conduct the tender offer for up to 35% of SM's total shares.

If the tender offer volume exceeds 35%, the total shares tendered will be allocated on a pro-rata basis. Experts expect that general shareholders will be able to sell only about half of their holdings through the tender offer. Jeong Yong-hyun, Head of Value Management at KB Asset Management, explained, "When calculated on a pro-rata basis, general investors can only sell about half of their shares through the tender offer even if they want to sell all, and the rest must be retained. Whether they gain or lose will be determined by long-term stock price fluctuations."

Those who bought SM shares at prices above 150,000 won are likely to face an unrealized loss for the time being. Responding to the tender offer would almost certainly result in a loss after considering taxes and other factors.

Kakao to Buy Up to 35%... Need to Consider Purchase Price and Profit/Loss

On the other hand, is it worthwhile to buy at around 120,000 won and respond to the tender offer? SM has a total of 23,810,401 issued shares. After excluding major shareholders HYBE (3,757,237 shares), Lee Soo-man (868,948 shares), Kakao (780,000 shares), Kakao Entertainment (387,400 shares), treasury shares (241,379 shares), and the estimated 260,000 shares held by Align Partners Asset Management, which has declared it will not participate in the tender offer, approximately 17,515,437 shares remain.

About 17,515,437 shares are estimated to be the tradable shares eligible for tender offer requests. Kakao has announced it will tender offer a total of 8,333,641 shares at 150,000 won per share. This means Kakao can buy only about 47% of the total tradable shares excluding major shareholders through the tender offer.

If you bought 100 shares of SM at the closing price of 113,100 won on the 13th, Kakao would buy about 47 of your shares at 150,000 won through the tender offer. This would yield a profit of 36,900 won per share.

After that, from the 27th when the tender offer period ends, you would need to sell the remaining 53 shares on the market. A simple calculation shows that you would need to sell the remaining 53 shares at 83,000 won or more per share to break even (excluding securities transaction tax and other fees).

If HYBE and Lee Soo-man, who hold an 18.45% stake, respond to Kakao's tender offer, the possibility for individual investors to resell at 150,000 won per share would drop to below 37% due to increased competition.

The tender offer process is also cumbersome. You must visit Korea Investment & Securities, the handling agent, in person. Since it is classified as an over-the-counter transaction, if the capital gains exceed 2.5 million won, a 22% capital gains tax on the excess must be paid. Additionally, a 0.35% securities transaction tax is separately imposed.

Meanwhile, 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. After the management rights dispute ends, it is expected that the PER will stabilize downward around 35 times, reflecting improvements in governance and corporate value enhancement. According to financial information provider FnGuide, the consensus target price for SM's stock by securities firms is 124,056 won.