A South Korean activist fund is calling for Hybe Co., the agency behind K-Pop sensation BTS, to raise its bid and offer to buy all shares in SM Entertainment Co., a smaller music label founded by the godfather of K-pop.
(Bloomberg) — A South Korean activist fund is calling for Hybe Co., the agency behind K-Pop sensation BTS, to raise its bid and offer to buy all shares in SM Entertainment Co., a smaller music label founded by the godfather of K-pop.
Hybe, the No. 1 K-pop agency managing NewJeans and other popular groups, launched a hostile bid for close to 40% of shares of SM, coming to the aid of founder Lee Soo-man as he fights to block SM’s deal with Kakao Corp. Hybe’s buying founder Lee’s 14.8% stake and offering to purchase another 25% from investors at 120,000 won per share, for a total of 1.14 trillion won ($900 million).
That price is too low, Lee Changhwan, chief executive officer at Align Partners Capital Management said in an interview with Bloomberg News. Lee, who set up Align in 2021 after stints at Goldman Sachs and KKR in Seoul and has about 1% of SM, said a partial stake for Hybe would also lead to confusion and lower morale at SM. SM executives issued a statement opposing Hybe’s offer last week.
“We think operating profit can triple or more in three to five years,” Lee said, adding that he expected SM shares to surpass 300,000 won apiece in coming years with the SM executives’ new growth plan. “My key focus is to maximize the shareholder value.”
Lee argued Hybe should buy the remaining 60% at higher prices to avoid any conflicts of interests between Hybe and its biggest rival SM. Hybe said it will accept all tendered SM shares even if the subscription missed the maximum target of 25% stake, it said in an emailed statement to Bloomberg.
“Hybe will be focusing on improving SM Entertainment’s corporate governance, in conjunction with SM’s announcement last January to revise the company’s internal management structure,” Jinsoo Jung, Chief Legal Officer at Hybe, told Bloomberg. “Hybe aims to take an active role in continuing SM governance improvement measures.”
Shares of Hybe fell about 2%, erasing earlier gain of as much as 4.7%. SM shares also pared gains and rose about 1%.
While Lee is advocating for a higher bid and complete takeover if Hybe proceeds, he also pointed out the agency would have big hurdles in pulling off an acquisition. Hybe should have done due diligence before announcing the proposed takeover, he said, adding that regulatory scrutiny is warranted because the combination of Hybe and SM would control more than 50% of the market.
“Hybe has made a risky move,” Lee said. “It has not done due diligence. The management and employees are against the takeover. The government should be looking into the deal for a potential antitrust issue.”
Align’s Lee was nominated to SM’s board, which last week announced plans for an issue of new shares to Kakao. That 217 billion won proposal — backed by Align — would have made Kakao the second-biggest shareholder in SM and diluted founder Lee’s control over the company.
Read: Godfather of K-Pop Teams Up With BTS Label to Battle Activists
He also played down the prospects of a bidding war between BTS’s label and internet conglomerate Kakao, which dominates the local social media scene. Kakao is not planning to take over SM, and will remain a strategic partner, Lee said, denying market speculations that the deal is a prelude to an eventual takeover of the K-pop agency.
“The stance of SM Entertainment’s management and artists is clear: we don’t want to be acquired by anyone,” he said.
Align last held about a 1% stake in SM at its most recent disclosure, CEO Lee said. It launched a campaign to reform corporate governance at the K-pop agency about a year ago. SM’s management has agreed to accept Align’s proposals including establishing committees to improve corporate governance and boost shareholder returns.
Korea is much more receptive to shareholder activism than in the past, thanks to better awareness of minority shareholder rights, Lee said. His fund has also launched a campaign to boost shareholder returns at local financial firms. “Overall people have a much better understanding of activism.”
–With assistance from Shinhye Kang, Seyoon Kim, Shery Ahn and Haidi Lun.
(Updates with comments from Hybe from sixth paragraph)
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