- According to the IB industry, Lee Sooman, the largest shareholder of SM Entertainment has been attempting to selling his stake (18.73%) since last year. At that time, he was in contact with Tencent and other Chinese companies.
- At the beginning of this year, HYBE offered to negotiate but LSM rejected this offer. It’s said that Lee Soo Man rejected the offer because HYBE already understands how to run a K-Pop agency successfully. As such, this would leave no place for his expertise in the company. Thus, it seems that Lee intends to remain a key figurehead in the industry despite selling his stake in SM Entertainment.
- After contacting domestic and foreign IT and game companies, it is now into negotiations with Kakao and Naver.
Why Is Lee Soo Man Selling His Stake In SM Entertainment?
- LSM is the largest shareholder with 18.73%. Following him, it's the Asset management company Korea Investment Management – 4.45% stake,
the Chinese tech conglomerate Alibaba – 3.71% stake and Public pension fund National Pension Service – 3.68% stake.
- According to investment bankers, Lee Soo Man has been attempting to sell his stake in SM Entertainment since 2020 after revealing that he has no intention of passing down his shares to his children. Instead, bankers say Lee has decided that a new partnership with a major corporation is necessary to further SM Entertainment’s development.
- It’s said that Lee Soo Man is looking to partner SM Entertainment up with an IT company; the music agency has recently ventured into technology like DEAR U, Kihno, and artificial intelligence.
- On top of that, a second reason for the sale has been proposed. Earlier this year, SM Entertainment was ordered to pay ₩20.0 billion KRW (about $18.0 million USD, which is 3.19% of the company’s net worth) to the Korean government after a tax investigation, just shortly after it was reported that the company made a net loss of ₩15.6 billion KRW (about $14.0 million USD) in the third quarter of 2020. Now, it’s said that Lee Soo Man appears to be fatigued by the intense tax investigation, making him want to sell up.
- In 2019, there was a embezzlement-controversy over LSM taking more than ₩10.0 billion KRW (about $9.00 million USD) from SM Entertainment through Like Planning, of which he owned 100%. At that time it was found that 44% of SM’s operating profit for the past five years flowed into Like Planning.
- In addition, the sluggish performance of subsidiaries such as resorts, restaurants, wine businesses, etc which were closely related to LSM’s personal hobbies raised doubts in the market. SM Ent has never paid a dividends since its listing.
Why Do They Want The Shares, Who Is More Likely To "Win" And What Are Possible Roadblocks?
- Kakao Entertainment currently controls about 5% of the South Korean entertainment market. With SM Entertainment under its belt, that hold jumps to almost 25%. This would put Kakao Entertainment in second place behind HYBE, which has a 33% market share. Kakao Entertainment itself is also set to debut on the stock market 2022, and a stake in SM Entertainment would greatly bolster their initial position.
-Plus, Kakao Entertainment would gain SM Entertainment’s DEAR U platform, which JYP Entertainment recently acquired a 23.3% stake in. DEAR U is aiming to debut on the stock market later this year, and Kakao recently announced it would be collaborating with UNIVERSE creator NCsoft. AI-powered K-Pop community UNIVERSE already hosts artists like (G)I-DLE, MONSTA X, THE BOYZ, ATEEZ, and WJSN. The combined power of DEAR U and UNIVERSE’s artists and offerings would present a huge force for Naver and HYBE’s Weverse to contend with.
- Naturally, this means it’s also in Naver’s interest to attempt the acquisition of SM Entertainment’s controlling interest before Kakao Entertainment does. Plus, Naver is already a leading player in the metaverse space with ZEPETO. Just as with DEAR U and UNIVERSE, a merging of ZEPETO and Naver Z with SM Entertainment’s plans for aespa and the SM Culture Universe presents a very desirable partnership.
- Kakao Entertainment and Lee Soo Man reportedly disagree on the value of SM Entertainment. Kakao Entertainment is said to have offered Lee ₩40,000 KRW (about $36.00 USD) per share—a possible total of ₩176 billion KRW (about $158 million USD) for the entire 18.73% stake. However, industry officials say Lee Soo Man rejected this deal. Over the past month, SM Entertainment shares have traded at an average of ₩39,300 KRW (about $35.40 USD) won each, peaking at ₩47,400 KRW (about $42.60 USD).
- On top of this, it’s said that Lee Soo Man has proposed continuing involvement with SM Entertainment through his private album production company, Like Planning, even after selling his stocks. This kind of outflow of funds has caused problems for investors in the past and could muddy the waters when it comes to Kakao Entertainment joining the stock market.
- Kakao Entertainment is also reportedly concerned about Naver’s close involvement with SM Entertainment (from Beyond LIVE to Naver’s 30% stake in SM Entertainment Japan).
- On Naver’s side, investment bankers say there’s currently bad blood between the two companies. Last year, Naver was set to integrate its V LIVE Fanship service with SM Entertainment’s own artist fanclubs powered by DEAR U’s LYSN. However, after Naver decided to transfer ownership of V LIVE to HYBE, this promise fell through.
- Steep increases in SG&A (selling, general & administrative) costs of SM Ent affiliates are emerging as variables for the sale of shares. Kakao is a company that dislikes business models that increase costs burden while Naver suffers from rising developer labor costs. The two companies may be reluctant to take on the affiliates but SM Entertainment may be unwilling to sell separately. According to filings on 31 May, last year’s SG&A expenses incurred in subsidiary projects were more than in the main enterprise. [SM Ent the music v. SM Studios]. Since March 2017, when Kim Youngmin took office, aggressive M&As have significantly increased the cost burden. In March 2017, SM Ent acquired a 28% stake in Mystic Story, an entertainment co, for 6.4B. In July of the same year, it invested 66B to acquire SK Planet’s M&C unit, and 6B to establish Everysing (now DearU). In March 2018, it acquired a 25.12% stake in KeyEast for 50B and 30.51% stake in FNC Add Culture (now SM Life Design Group) for 30B. The M&As have contributed growth but also costs. SM Ent (main) has been recording double digit OP but the consolidated operating profit ratio decreased YOY from 7.8% in 2018 to 1.1% in 2020 due to the costs of the five major affiliates. Even ignoring last year’s slump due to COVID-19, it is hard to expect the low cost, high efficiency growth of the past. Kakao is focused on efficient growth. Analysts say Kakao withdrew from Ebay Korea acquisition bc of the costs burden. The prevailing view is that the SM Ent affiliates do not have enough strategic value (for Kakao) to be saddled with them. Naver is suffering from high labor costs due to stock options and stock grants. The two companies are predicted to acquire IP of SM Ent artists but prefer a deal without the affiliates. On the other hand, it would not be easy for Lee Sooman to sell his stake in SM Ent and maintain control only over SM Studios (the five affiliates). There is a limit to the competitiveness of the remaining affiliates without SM Ent.
source: TMIKpop 1 2 3 4, koreaboo 1 2 3, soompi, hankyung, SBSBiz, investchosun, naver, thebell
tl;dr: bigger fish might eat big fish but also maybe not because the fish all are not satisfied with the other fish.