Kakao-SM Entertainment deal challenged by agency's founder

Kakao is buying 9.05 percent of SM Entertainment for 217.2 billion won ($172.8 million) to become the second-largest shareholder of the K-pop agency, which is known for the creation of aespa and NCT. Lee Soo-man is challenging the deal — claiming ...

SM Entertainment founder Lee Soo-man speaks during a World Travel & Tourism Council (WTTC) Global Summit held Nov. 30, 2022, in Saudi Arabia. [SM ENTERTAINMENT]

Kakao is buying 9.05 percent of SM Entertainment for 217.2 billion won ($172.8 million) to become the second-largest shareholder of the K-pop agency, which is known for the creation of aespa and NCT.

Lee Soo-man, founder and largest shareholder of SM Entertainment, is challenging the deal — claiming that it is illegal — and seeking an injunction from the courts to stop the transaction, according to his attorney at Yoon & Yang LLC.

Kakao said Tuesday that it will buy 1.23 million newly-issued shares, or 4.91 percent of SM Entertainment, for 91,000 won per share and 105.2 billion won of convertible bonds, which will give Kakao access to 1.14 million additional shares. The boards of the two companies voted in favor of the investment on Tuesday and said the transaction will be completed by March 6.

This deal will leave Kakao as the second-largest shareholder following Lee, who owns 18.4 percent of the agency prior to the deal. His stake after Kakao acquires 9.05 was not disclosed.

Kakao and SM Entertainment on Tuesday also signed a business agreement with Kakao Entertainment to produce new K-pop artists and run global businesses. Kakao and Kakao Entertainment will manage K-pop artists at SM Entertainment and use intellectual property (IP) related to SM artists to develop new films, dramas, music and other creative output.

SM Entertainment co-CEOs Lee Sung-soo, left, and Tak Young-joon [SM ENTERTAINMENT]

“We hope to secure strong growth momentum through the agreement with Kakao so that SM Entertainment may become a leading entertainment company globally,” said Lee Sung-su and Tak Young-jun, co-CEOs of SM Entertainment, in a press release.

SM Entertainment and Kakao have been discussing a possible investment since 2021, which makes the latest deal “an effort to disrupt a shareholder’s influence on a company,” according to Ahn Sang-hyun, Lee’s attorney.

“Lee Soo-man had been in talks with Kakao about selling his stock, but that discussion was halted,” he said. “This decision from the company was made regardless of Lee’s wishes. We will be filing for an injunction with the court to suspend the illegal efforts of SM’s board.”

Lee is not a board member and holds no management position at the company.

SM Entertainment fell 2.28 percent on Tuesday, but they are up 36 percent on year. In late 2022, the company severed ties with Like Planning, a private company owned by Lee that had been taking up to 6 percent of SM Entertainment’s revenue for Lee’s “insight” into making music.

The contract between the two companies ended on Dec. 31, and SM Entertainment has been rolling out measures to improve governance, adding three more outside directors to its board and making internal dealings more transparent.

The agency also said last Friday that it will start a multi-label system for the first time in its 28-year history, vowing to remove its dependence on Lee as the chief music producer and roll out two new groups each year.

Kakao said that it has not made a decision on whether to buy additional shares of SM Entertainment yet.

BY YOON SO-YEON [yoon.soyeon@joongang.co.kr]