Hybe Has the Advantage in SM Acquisition Regardless of Court’s Decision on Lee Soo-man’s Injunction Request

Kakao founder Kim Beom-su, former chief of SM Entertainment Lee Soo-man, and Hybe chairman Bang Si-hyuk

As Hybe follows Kakao and joins the bid for SM Entertainment, the battle over the management of the entertainment company has now become one between Kakao, Align Partners, and SM versus Hybe and former SM chief Lee Soo-man. The court’s decision on executive producer Lee Soo-man’s request for an injunction blocking the issuance of new shares and convertible bonds will be an important turning point in determining who will take over the management of SM Entertainment.

According to DART, an electronic disclosure system run by the Financial Supervisory Service, Hybe signed a contract purchasing 14.80% of SM shares owned by Lee Soo-man for 120,000 won per share on February 10. In addition, Hybe announced a tender offer to acquire 25% of SM common shares for 120,000 won per share by March 1. If the company succeeds in the public takeover bid, it will possess 39.80% of SM shares.

If Hybe acquires an additional 25% of SM shares through the tender offer, the company and Lee will possess a total of 43.45% of SM shares.

The securities industry believes the court’s decision on the injunction and Kakao’s ensuing decision will determine the outcome of the battle over the management of SM. On February 7, the SM board of directors decided to hand 9.05% of shares to Kakao by issuing new shares and convertible bonds in order to hold Lee back. If this plan goes through, it will reduce Lee’s shares to just 16.78%. Lee Soo-man argued that issuing new shares or convertible bonds to a third party for the purpose of exerting influence over corporate governance while a battle for management of the company was ongoing was illegal and asked the court for an injunction banning the issuance of new shares and convertible bonds. Lee Sun-hwa, a researcher at KB Securities, said, “If the court accepts the request, Kakao is likely to look for another offering.” In other words, the injunction would disrupt Kakao’s plan to secure 9.05% of SM shares, forcing the company to abandon its pursuit of SM.

However, some experts argue that even if the court dismisses Lee’s request and the company is able to obtain 9.05% of SM shares, things may not be so favorable to Kakao. Kakao can secure approximately 29% of voting rights only when backed by Align Partners and their shares. This is far behind the 43% owned by Hybe. In this case, Kakao may have to buy SM shares for a higher price than the 120,000 won per share, which Hybe offered for its takeover.

Another key factor is how receptive SM shareholders will be of Hybe’s tender offer. Hybe will purchase all the shares if less than 25% are available in the public takeover and plans to purchase up to 25% by proportional distribution if more shares are offered. So the percentage of SM shares Hybe purchases will be determined by how SM shareholders respond to the takeover bid. On February 10 when Hybe announced its plans for the tender offer, SM share prices soared by 16,200 won (16.45%) and closed at 114,700 won, close to the price Hybe offered.

Align Partners Capital Management, which owns 1.1% of SM shares, argued that the 120,000 won offered by Hybe was too low and claimed the entertainment company should “significantly raise the price.”