Decision Needed Within Two Weeks... Kakao's Complicated SM Acquisition

Acquisition 'High-Degree Equation' Depending on Injunction Timing and Content
Ruling Must Come Before HYBE's Tender Offer Completion for Acquisition Opportunity
Possibility of Acquiring Small to Mid-Sized Entertainers Like Cube Entertainment Instead of SM

[Asia Economy Reporter Yuri Choi] With HYBE entering the bid to acquire SM Entertainment (SM), Kakao's calculations have become complicated. Kakao must make a decisive move before HYBE completes its tender offer on the 1st of next month, leaving little time. If HYBE successfully completes the tender offer, Kakao's acquisition of SM will effectively be off the table. Different scenarios will unfold depending on whether the court issues a ruling on the injunction request filed by former SM Chief Producer Lee Soo-man within the next two weeks.

The first variable is when the court will deliver its decision on the injunction request. On the 8th, Lee submitted an injunction request through the law firm Hwawoo to prohibit SM from issuing new shares and convertible bonds. The claim is that issuing new shares to third parties other than shareholders during a management rights dispute is illegal under the Commercial Act. Considering that rulings typically take 2 to 4 weeks, the turning point is expected around the end of this month or early next month. Meanwhile, HYBE has committed to tendering for 25% of SM shares held by minority shareholders by the 1st of next month. If HYBE also acquires Lee's 14.8% stake, it will effectively secure control over SM.

Industry insiders believe that a ruling before the 1st of next month is necessary for Kakao to create an opportunity to acquire SM. In other words, Kakao will find it difficult to make additional purchases of SM shares before the ruling. The key issue in the ruling is whether SM is currently in a management rights dispute. If the court determines that there is a management rights dispute, Kakao will not be able to secure its 9.05% stake in SM. If Kakao takes further action and confronts the HYBE-Lee alliance, it risks creating a management rights dispute itself, thereby shooting itself in the foot.

If the court dismisses the injunction request before the 1st, Kakao will have options. It can acquire additional SM shares through a tender offer like HYBE. Although it would need to offer a price higher than HYBE's tender offer price of 120,000 KRW per share, Kakao has the financial capacity. Kakao Entertainment raised 1.2 trillion KRW last month through a pre-IPO (pre-listing equity investment) and will receive the first payment of 890 billion KRW on the 20th. Additionally, Kakao can utilize its cash and cash equivalents totaling 1.24 trillion KRW as ammunition. HYBE is deploying over 700 billion KRW for its tender offer.

Park Sung-guk, a researcher at Kyobo Securities, analyzed, "Given the nature of the pre-IPO, it is highly likely that Kakao Entertainment had to commit to an IPO at a certain valuation when raising funds from shareholders. Since there is no other entertainment company that meets the conditions as well as SM, Kakao is desperate to acquire SM."

If the ruling comes after the 1st, the outcome of HYBE's tender offer becomes a variable. If HYBE reaches its target of 25%, the game ends with HYBE's victory. However, if minority shareholders do not respond, Kakao will have an opportunity. On the 13th, SM's stock price was 116,000 KRW, close to the tender offer price. An investment banking industry insider said, "Since HYBE is buying at the same price of 120,000 KRW per share as Lee, some shareholders may respond, but if there is an expectation that Kakao could make a counteroffer, the situation could change."

Regardless of the timing of the ruling, if the court accepts the injunction request, Kakao's acquisition of SM will be off the table. In that case, Kakao may pursue acquisitions of other entertainment companies. Among small and mid-sized entertainment companies, Cube Entertainment, the largest in scale, is mentioned as a candidate. However, SM's market capitalization is 2.7 trillion KRW, while Cube Entertainment's is 300 billion KRW, a difference of more than nine times. An industry insider said, "There are no talks of sales with large companies like JYP or YG. Among small and mid-sized companies, Cube Entertainment has scale and good performance prospects, but there is a big gap compared to the Big 4 entertainment companies."

Kakao has firmly closed its mouth on various scenarios, drawing a clear line by stating, "There are no plans to acquire additional shares of SM."

This content was produced with the assistance of AI translation services.