Next move of Kakao yet to be determined amid HYBE joining fierce battle over SM’s management rights

▲ This file photo shows the logo of Kakao. (Yonhap)

▲ This photo, provided by SM Entertainment, shows the logo of the K-pop powerhouse. (PHOTO NOT FOR SALE) (Yonhap)

SEOUL, Feb. 13 (Yonhap) -- Amid the steaming hot battle ongoing for the management rights of SM Entertainment, the next move of the tech giant Kakao Corp., which now stands as the second-biggest shareholder in SM, has been drawing all the eyes in the K-pop industry.

With HYBE coming to the aid of founder Lee Soo-man, the largest shareholder of SM Entertainment, who has been fighting to hinder SM’s current management’s deal with Kakao, Lee supposes that Kakao may eventually join hands with the opposing force of SM executives to dilute Lee’s control over the company.

Considering how Kakao has particularly been continuously pursuing the acquisition of the K-pop powerhouse to strengthen its own content business for a long time, such allegations have not subsided among those in the investment industry.

It started with the SM executives reportedly holding an urgent board meeting on Feb. 7, where they decided to issue new shares and convertible bonds to Kakao in a third-party manner, a decision that would have promoted Kakao to hold the position as the second-biggest shareholder securing 9.05% shares.

In response, Lee then filed an injunction banning the issuance of new shares and convertible bonds to third parties, and that was when HYBE jumped into this battle of K-pop godfather against Kakao. As HYBE reached out to Lee with an offer to acquire SM via an open purchase, the confrontation now has Lee and HYBE together going up against SM executives and Kakao.

Under such circumstances, the attention is now shifted toward the next move Kakao would take, as it has been emphasizing that the corporate was not interested in acquiring SM but only in strengthening its content business.

If Kakao was to stop HYBE’s acquisition of SM, its only way would be by buying its shares at an even higher price. Nevertheless, it has been analyzed that HYBE, which has bought 14.8% of Lee’s shares and even made a public purchase, stands in a more profitable position.

Kakao is yet drawing a clear line, claiming, “It has nothing to do with the management dispute,” and “there are no future plans in securing additional shares.”

In a telephone interview with Yonhap News Agency on Sunday, a Kakao official said, “The paid-in capital increase is the result of a long-term discussion on the potential synergy effect and collaboration between the two companies, which has nothing to do with SM’s currently undergoing management rights dispute.”

However, the industry has not yet ruled out the possibility that Kakao may take over once again when Lee’s lawsuit for invalidation of the paid-in capital increase gets rejected.

Given that Kakao has long envisioned impactful business cooperation with the acquisition of SM in mind, it is yet to know whether its management strategy would take a sudden turn depending on the court’s ruling on the filed injunction.

Some even draw a scenario in which Kakao makes an attempt to back-door list Kakao Entertainment after purchasing an additional share in SM. There is also another possibility that the shareholders’ meeting to be held next month would gather some support or purchase additional shares.

Park Sung-kook, a researcher at Kyobo Securities, laid out his prediction by saying, “How much of SM shares Kakao additionally purchases would determine whether HYBE would, at last, become the largest shareholder or not,” adding, “However, there is always a possibility for this battle to go more fierce.”

Lee Hyo-jin, a researcher at Meritz Securities, said, “If Lee Soo-man obtains the injunction he had filed, the issuance of the paid-in capital increase and convertible bonds may fail, which would naturally prompt both sides to start tender offers to secure shares.”

Despite such fuming controversies and propositions, Kakao is yet adhering to its original stand of having “nothing decided.”

However, this can also be interpreted as the tech giant not completely closing its door of making its try to acquire SM, which would bring the entertainment industry to take a completely new turn.

(This article is translated from Korean to English by Ha eun Lee)

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