Kakao to buy 9.05% stake in SM Entertainment to become 2nd largest shareholder

[Photo by Park Hyung-ki]

South Korea’s platform giant Kakao Corp. has decided to buy a 9.05 percent stake in SM Entertainment Co. to become the second-largest shareholder, a move that will help strengthen its grip on the entertainment giant founded by Lee Soo-man.

Kakao said in a regulatory filing on Tuesday that it will acquire 1.23 million new shares in SM Entertainment in the form of a rights offering to a third party and additionally secure 1.14 million common shares through convertible bonds. The stake purchase worth 217.2 billion won ($172 million) will allow the company to become the second-largest shareholder of SM Entertainment.

The entertainment giant’s board on Tuesday approved the share and bond issuance. The acquisition will be made on March 6, Kakao said.

“The latest investment and partnership will help both companies in bringing the Korean content to global mainstream,” said Bae Jae-hyun, executive vice president and chief investment officer at Kakao.

SM Entertainment also said that it will use the proceeds to carry out “aggressive investment.”

The Kakao-SM Entertainment alliance is seen as a move to completely eliminate SM Entertainment founder and largest shareholder Lee from management.

The entertainment company had also announced earlier a future business plan dubbed “SM3.0” without Lee.

Kakao is expected to participate actively in management after the stake acquisition.

According to multiple industry sources, Bae will be appointed as a non-executive director at SM Entertainment. Another executive from Kakao will be responsible for overseas business.

Market insiders note that the acquisition is part of a bigger picture of SM Entertainment handing over its management rights to Kakao, although this would need shareholder approval.

SM Entertainment founder Lee with 18.8 percent ownership, immediately opposed to Kakao’s move and filed an injunction to ban stock issuance, citing “violation of shareholder preemptive rights.”

Lee is also considering raising a proposal to shareholders to replace SM Entertainment’s CEO.