HYBE open to SM Entertainment deal with Kakao

HYBE's acquisition of SM Entertainment shares does not constitute a "hostile" takeover and represents a great opportunity for both companies, HYBE CEO Park Ji-won said after the company released 2022 earnings, which came in below expectations.

HYBE hosted a conference call to announce its 2022 fourth quarter earnings for domestic and overseas analysts on Tuesday. The picture above shows HYBE’s headquarters in Yongsan District, central Seoul on the same day. [YONHAP]

HYBE's acquisition of SM Entertainment shares does not constitute a "hostile" takeover and represents a great opportunity for both companies, HYBE CEO Park Ji-won said after the company released 2022 earnings, which came in below expectations.

He also said that HYBE is willing to work together with Kakao, which is also buying SM Entertainment shares, on a deal involving the target agency.

“We are not hostile to any parties,” Park said at the online conference call Tuesday to report HYBE’s earnings.

He said the company bought shares from the largest shareholder and then made a tender offer to buy shares from other investors under the same terms, and is now one of the shareholders of SM Entertainment.

Park said that a HYBE-SM Entertainment merger can maximize the interests of both parties: HYBE, which has built up experience in introducing artists in North America, can help SM Entertainment artists do the same. SM Entertainment can help HYBE grow its influence in Southeast Asia, “as it’s expertise that it has solidified over years.”

“I also viewed the ‘SM 3.0’ project that SM released today,” said Park, referring to SM’s leap to start anew multi-label system. “HYBE, which has been running the company under multi-label system for a long time, can provide SM with the needed resources.”

HYBE is also open to working with Kakao, Park says.

“Based on the assumption that Kakao does not have interest in business management, we are open to business proposals that benefit SM Entertainment, but as Kakao has yet to inform the specifics into its partnership or proposal, understand that it’s too early for me to mention about it.”

HYBE CEO Park Ji-won [HYBE]

HYBE net profit fell 75.9 percent to 33.9 billion won ($26.1 million) in 2022, falling far short of market consensus of 259.4 billion won. Operating profit increased 24.9 percent to 237.7 billion won, less than analyst expectations of 238.8 billion won.

The company cited the relatively low net profit due to Ithaca Holdings impairment loss. HYBE acquired Ithaca Holdings, a Los Angeles-based entertainment company and talent agency, for $1 billion.

“This is mainly due to non-operating expenses including impairment loss on goodwill for Ithaca holdings and valuation loss on convertible bonds,” Chief Financial Officer Lee Kyung-jun said. “Ithaca holdings posted the earnings before interest, taxes and amortization of 63.5 billion won in 2022 with solid business performance in line with its business plan. However 80 billion won of impairment loss was recognized in the process of goodwill valuation because of rising discount rate on the back of rising interest rates. In addition, convertible bonds issued in 2021 incurred 40 billion won evaluation loss because it’s linked to our stock price. However, this cost has no impact on the cash flow and the same amount will be recovered as the profit at the time of bond repayment.”

Revenue was a record breaking and consensus-beating 1.78 trillion won.

HYBE also expects profitability from its recently-acquired QC Media Holdings, an Atlanta-based hip-hop label and management agency, for 314 billion won, earlier this month.

QC Media holdings represent artists Lil Baby, Lil Yachty and City Girls.

“Its earnings in 2022 are expected to grow significantly as its main artists such as Lil Baby are scheduled to participate in large-scale tours, offline events and albums sales,” Lee said.

For HYBE’s artists, BTS’s Jimin will release a solo album in March and Suga will start a world tour in April, which will cover the United States and Asia.

HYBE confirmed that it “will absolutely and fully support” the return of BTS as a whole after members fulfill their respective mandatory military services. Jin, the oldest member, has been serving in the army since December.

HYBE also has a full line-up of newly debuting K-pop acts this year.

HYBE’s KOZ Entertainment, founded by rapper Zico, is planning to debut a new boy band. Its Pledis Entertainment is to debut a new boy band, its first boy band in eight years since Seventeen in 2015.

HYBE and Universal Music Group are working to prepare to debut a girl group based in the U.S.

HYBE was founded in 2005 as Big Hit Entertainment by Bang Si-hyuk and stormed the K-pop world with hit makers such as BTS.

An SM Entertainment-HYBE deal has been mentioned in the local press for a number of years, and has finally become a possibility as the founder of SM Entertainment, Lee Soo-man, came to an understanding with HYBE to join forces and acquire SM Entertainment to fend off a takeover by Kakao.

Earlier this month, HYBE announced that it will buy 14.8 percent of SM Entertainment from Lee and 25 percent in a tender offer at 120,000 won per share, ultimately aiming for a 40-percent stake and becoming the largest shareholder of the K-pop powerhouse.

HYBE is up against Kakao, which will buy 9.05 percent of SM Entertainment. The deal was challenged by Lee, who filed for an injunction to have the deal suspended.

While HYBE promised management independence for SM Entertainment after the takeover, many associated with SM Entertainment, including SM Entertainment Chief Financial Officer Jang Cheol-hyuk and CEO Lee Sung-su, labeled HYBE’s effort as “hostile."

BY LEE JAE-LIM [lee.jaelim@joongang.co.kr]