BTS agency Hybe in battle of the K-pop bands with Kakao

Two of South Korea’s biggest entertainment companies have locked horns for control of K-pop juggernaut SM Entertainment.

Market leader Hybe and the entertainment subsidiary of Korean tech giant Kakao have both announced deals to buy stakes in SM, as the grip of its septuagenarian founder Lee Soo-man weakens following a successful campaign by activist shareholders.

Last week, Hybe, the agency behind K-pop sensation BTS, said it would buy a 14.8 per cent stake from Lee and offered to buy another 25 per cent from minority shareholders for a total of Won1.14tn ($900m). That came just days after Kakao Entertainment agreed to buy a 9.05 per cent stake in SM through a rights offering and convertible shares.

A rally in SM shares this week took them above Hybe’s offer price of Won120,000 per share. Analysts see the bidding war intensifying, with more suitors likely to emerge and Kakao expected to come up with a counter offer.

The K-pop industry had been dominated by three music agencies — SM, JYP and YG Entertainment — before the emergence of boy band BTS, whose rapid ascent to global stardom over the past decade has helped make Hybe the sector’s dominant player.

Hybe’s takeover attempt comes as it contemplates life without BTS. All seven members are obliged to complete military service. Jin, the group’s oldest member, began his service in December and other members are also expected to follow him over the next couple of years.

“For Hybe, acquiring SM can help it pick up the slack amid BTS’s hiatus,” said Park Seong-guk, an analyst at Kyobo Securities. “Hybe can increase its operating profit by 50 per cent by acquiring SM.”

Park added: “For Kakao, it is more important to take over SM because it will be the best way to enrich its content quickly ahead of any potential listing.”

On Thursday, Hybe proposed seven candidates for SM’s board of directors and an electronic voting system for minority shareholders, amid longstanding shareholder concerns about Lee Soo-man’s personal grip over the K-pop agency.

The controversial impresario, a former folk singer who studied computer engineering in California, owns 18.4 per cent of SM Entertainment but holds no formal position within the company.

Hybe’s proposal follows a successful campaign led by Seoul-based activist fund Align Partners to impose an independent auditor on SM and to increase the number of outside directors to improve its corporate governance.

Align founder Changhwan Lee, who has been nominated as a board member by SM’s management, said Hybe’s offer price was too low, adding that its acquisition of SM could raise antitrust issues. SM’s management has expressed its opposition to Hybe’s takeover attempt.

Last week, Lee Soo-man and Hybe chair Bang Si-hyuk issued a joint statement promising to grow both companies so as to “enhance K-pop’s global competitiveness” and to pursue Lee’s vision of establishing K-pop in the metaverse.

Kyobo’s Park said: “Lee Soo-man wants Hybe to win because he believes he would still be able to produce some music overseas for SM under Hybe’s control.”

Albert Yong, managing partner at Seoul-based hedge fund Petra Capital Management, said SM’s annual meeting next month would be crucial. “The AGM will be a watershed moment for SM’s future. Hybe seems to be in a good position to win the battle.”