Target to secure up to 35% stake in SM, when it succeeds, it overtakes HIBE and becomes the largest shareholder.
Kakao pulled out a tender offer card to acquire the management rights of SM Entertainment. The plan is to buy up to 35% of general shareholder stock at 150,000 won per share. This is 25% higher than the 120,000 won per share that HIBE offered in the tender offer last month. If the tender offers success, Kakao will become the largest shareholder of SM Entertainment, overtaking HIBE, which has a 19.43% stake in voting rights.
According to the Investment Banking (IB) industry on March 6th, Kakao and Kakao Entertainment held an emergency board meeting durning the same day and decided to implement the tender offer from March 7th to the 26th. According to Korea Investment & Securities Co. The total acquisition amount is about 1.25 trillion won, with Kakao and Kakao Entertainment each investing half of the amount. Previously on the same day, HIBE announced that 233,817 shares (0.98%) responded to the tender offer of SM Entertainment, which had been carried out until March 1st. This is well below the target of 25%. HIBE has secured a total of 15.78%, including the stake bought from former SM Entertainment general producer Lee Soo-man last month. Including the remaining 3.65% of the former general manager, who has been delegated voting rights, the total secured by HIBE is 19.43%.
It is interpreted that Kakao decided to push ahead with the tender offer under the judgment that Kakao Entertainment can take a step forward and become competitive in the global market only when it secures intellectual property (IP) through the acquisition of management rights of SM Entertainment.
Kakao bet 1.2 billion… 'Declared War' to HIBE…
Kakao Enter is strong for global growth
Kakao made a bet on taking over the management rights of SM Entertainment. Kakao reveals the tender offer card he had been preparing under the surface. There were also impressions that the acquisition of new stocks was frustrated due to the court's brakes, and that the lineup would be repaired, but in the end, it was decided to go head-to-head. HIBE, who had the chance to win, is now in a state of emergency. In order to defend management rights, it is mandatory to increase the shareholding ratio, but there is no choice but to worry about the winner's curse’. If Kakao's tender offer succeeds and the current management, who is more closer to Kakao, is retained at the shareholders' meeting in March, they will face an unprecedented situation in which they cannot use their hands in management even after spending 450.8 billion won to secure their 15.78% stake.
Kakao pulled the trigger
The reason why Kakao and Kakao Entertainment made this surprise decision on the tender offer on this day was confirmed by the result of the dull tender offer of HIBE. HIBE announced on the same day that it acquired 233,817 shares of SM Entertainment through a tender offer last month. The stake is 0.98%, far below the original target of 25% (5,951,826 shares). HIBE secured a 15.78% stake in SM Entertainment in addition to the 14.8% it acquired from former general manager Lee Soo-man last month. The total stake is 19.43%, including the remaining 3.65% stake that Lee is expected to sell to HIBE in the future.
Kakao plans to become the largest shareholder by securing a 35% stake. At the end, it proposed 150,000 won per share, 25% higher than HIBE's 120,000 won per share.
Kakao Entertainment’s ‘Victory Card’
Kakao's decision to push ahead with SM Entertainment's tender offer despite some concerns about the winner's curse is interpreted as a judgment that SM Entertainment is absolutely necessary to secure Kakao Entertainment's global growth engine.
Until 2015, Kakao Entertainment did not have any outstanding businesses except for Podo Tree (predecessor of Kakao Page), a webtoon/web novel platform. Afterwards, he bought movie and drama production companies (film studios, Moongwang Film, Gline, Man Pictures, and Writing & Drawing Media), entertainment agencies (BH Entertainment, Management Soop, Antenna), and music labels (Starship, Cracker) in turn. Currently, there are only 41 affiliates. With sales of KRW 1.3751 trillion in the third quarter of last year, it has grown into a leading entertainment company in Korea, surpassing HIBE (sales of KRW 1.2426 trillion in the third quarter) and CJ ENM (KRW 1.1785 trillion).
From the standpoint of Kakao Entertainment and Kakao, which aims to expand “Beyond Korea,” the last remaining puzzle was “global growth.” Kakao Entertainment has shown competitiveness in the global market in the story sector, such as the growth of Piccoma in Japan, the acquisition of Tapas Entertainment in North America, and the launch of webtoon service in Southeast Asia, but has yet to see significant results in other businesses.
In particular, Kakao Entertainment's core investment, Melon, is the country's No. 1 music platform and music distributor, but its presence in the global market is not significant. The general evaluation of the market is that Kakao Entertainment needs to acquire SM Entertainment in order to step forward in the global market.
HIBE has so far expressed its clear intention to cooperate with Kakao under the premise that it has no intention to participate in management rights and will not go against the interests of SM Entertainment. It was a principle that could be put forward as the largest shareholder of SM Entertainment. However, as Kakao took over management rights through a tender offer, an all-out war between the two sides became inevitable.
HIBE is also open to the possibility of raising its stake by making another tender offer at a price higher than Kakao's offer. HIBE has selected Morgan Stanley as the organizer and has started attracting investments of up to 1 trillion won. At the same time, at the shareholders' meeting on the 31st, the need to keep the current management in favor of Kakao in check and to have their recommended personnel enter the board of directors has increased.