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Kakao issues statement in ongoing war of words with Hybe over SM deals

By Chris Cooke | Published on Monday 27 February 2023

The CEO of the entertainment division of South Korean internet firm Kakao has defended his company’s proposed deal with SM Entertainment after it was criticised on Friday by Hybe, now the biggest shareholder in SM.

The new statement by Kakao Entertainment co-CEO Kim Sung-soo is the latest to be put out in an increasingly eventful war of words between the three South Korean entertainment companies.

The proposed deal between SM and Kakao would see the latter acquire a 9% stake in the former, with the entertainment division of Kakao then handling the global distribution of music released by SM-signed artists.

The alliance is opposed by SM founder Lee Soo-man, who is trying to block the deal through the courts. An initial hearing in that legal dispute was held last week, with the court requesting more information from both sides.

Concurrent to all that, Lee agreed to sell the majority of his shares in SM to Hybe, a rival K-pop company best known as the home of BTS. That share sale gives Hybe a 14.8% stake in SM, making it the biggest single shareholder in the company.

Hybe has also expressed an interest in buying more shares with ambitions to secure a controlling 40% stake. Management at SM oppose those plans, accusing Hybe of pursuing a “hostile takeover”.

Despite the mounting tensions, Hybe CEO Park Ji-won previously said that he wasn’t opposed in principle to the SM/Kakao partnership, providing the deal between the two companies was in the best interest of all SM shareholders. But, on Friday, Hybe concluded that that wasn’t the case.

In fact, Hybe claimed in a statement, the proposed SM/Kakao deal puts the internet firm in a more preferential position than all the other SM shareholders, including Hybe. In particular, the deal allegedly gives Kakao a priority status to buy any new shares or equity-linked securities that SM might issue in the future.

According to the Korea JoongAng Daily, Hybe stated: “Kakao Entertainment can use [this priority status] to continuously increase its shares of SM by issuing new shares through a third-party allotment”. This, it added, is “unfair to other shareholders as the value of their shares can be diluted”.

Hybe also took issue with the distribution element of the deal, arguing that Kakao Entertainment will basically have “exclusive rights over SM’s global music distribution without a limit on the time period”.

Management at SM quickly hit back at Hybe’s statement. It said that restrictions already in place regarding the issuing of new shares means the scenario described by Hybe that would allow Kakao to continuously increase its shareholding is not realistic.

It also said that the claim it had granted Kakao distribution rights in perpetuity was “nonsense” and that that element of the deal was still being worked out. Plus there are plans for SM and Kakao to launch a joint venture to distribute music in the Americas, so SM isn’t giving Kakao a big global opportunity it won’t get to participate in.

Kakao Entertainment’s co-CEO issued a statement about all this earlier today. Again according to the Korea JoongAng Daily, he said that his company “can no longer remain silent in the midst of this situation where the existence of the SM/Kakao partnership is being threatened” in a way that “fundamentally hurts the future development” of SM, Kakao and Hybe.

He also disputes Hybe’s interpretation of the proposed agreement around future SM shares, which – he argues – is a pretty “run-of-the-mill” arrangement designed to protect a strategic partner without affecting the rights of other shareholders.

Kakao seems committed to completing its deal with SM, although Kim admitted that “a full-scale revision of our previous strategy is inevitable”.

We await to see where this all goes next.