HONG KONG, Feb 22 (Reuters Breakingviews) – Worldwide boy-band sensation BTS could also be on hiatus, however refreshing new monetary acts threaten to upend the world of Okay-pop, and maybe South Korea. The nation’s largest potential hostile takeover hangs within the steadiness, as music company Hybe (352820.KS), greatest recognized for managing the favored seven-member group vies for management of rival SM Leisure (041510.KQ). The saga showcases a cussed founder, a rising activist funding fund and a possible white knight. Look previous the spectacle, nevertheless, and there are indicators of actual progress for shareholders.
The battle over 28-year-old SM Leisure, the $2.3 billion power behind Ladies’ Technology and EXO, is at coronary heart a household feud. Entrepreneur Lee Soo-man, Okay-pop’s godfather and the SM within the firm’s title, squared off in an influence battle together with his spouse’s nephew, Lee Sung-su, SM’s chairman and chief govt. The youthful Lee teamed up with small shareholder Align Companions Capital Administration, an area fund campaigning in opposition to the elder Lee’s outsized affect at SM, its bloated company construction and valuation low cost to rivals, amongst different issues.
Align has a degree. The SM founder till lately held an 18.5% stake, however no official title; the corporate’s board is stacked together with his long-time associates. Final yr, the fund led by Lee Chang-hwan (no relation), an alum of KKR (KKR.N) and Goldman Sachs (GS.N), garnered sufficient assist from shareholders to nominate a brand new unbiased auditor on the board after criticising SM’s opaque royalty funds to Lee Soo-man’s non-public firm. A number of months later, SM stated it was severing ties with the founder, together with terminating related-party transactions.
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It is a victory by a pushy investor not often seen in a area dominated by family-owned conglomerates. Paul Singer’s feisty U.S. agency, Elliott Administration, made solely restricted headway difficult native champions Samsung and Hyundai. Against this, homegrown Align represents a brand new, nimbler breed of dissidence slowly wining over mom-and-pop buyers and company bosses annoyed by languishing valuations. This yr, SM nominated Align’s boss as an out of doors board director and unveiled a brand new strategic imaginative and prescient to spice up gross sales and profitability; the choice promptly gained the endorsement of $22 billion web large Kakao (035720.KS), which in February unveiled plans to purchase a 9% stake in SM for 217 billion gained ($167 million).
LACK OF HARMONY
The septuagenarian Lee is combating again. He challenged Kakao’s funding in court docket. Furthermore, he offered the majority of his shares to SM’s prime competitor, Hybe. The $5.8 billion firm has been diversifying to cut back its reliance on BTS, which analysts at NH Funding & Securities estimate accounted for 70% of income in 2021. With members of the band set to serve South Korea’s necessary navy service, Hybe is now eyeing an extra 25% stake in SM via a young supply. The tactic would improve its stake to roughly 40%. Final week, it proposed its personal slate of board candidates, together with three Hybe executives.
Kakao has but to announce its subsequent transfer, however the prospects of the super-app operator coming in to derail Hybe’s effort has helped energy a whopping 60% inventory rally at SM this yr alone. The enterprise now trades at roughly 16 instances forecast EBITDA for the subsequent 12 months, in keeping with Refinitiv, practically double its five-year common, however nonetheless a reduction to friends. Hybe trades at 24 instances and JYP Leisure’s fetches 18 instances.
SM and Align have each come out in opposition to Hybe’s hostile takeover. Issues that Hybe executives will prioritise their very own shareholders over SM’s minority backers have some validity. Antitrust regulators can be watching, too: the 2 corporations mixed account for greater than half of home document gross sales, in keeping with Align. The fund has known as for Hybe to purchase all of SM at the next worth as a substitute of pursuing strategies of creeping management.
A few of the fears could also be overblown, nevertheless. Hybe can be forking out over 1 trillion gained, greater than half its forecast 2023 internet money pile, for the 40% shareholding in SM, so it will be within the purchaser’s curiosity to enhance SM financially. To that finish, Hybe has additionally proposed different modifications, together with splitting the chairman and CEO roles.
SWEETER MUSIC
Hybe has but to element strategic plans for its goal, nevertheless. Park Ji-won, the chief govt, lately stated the mixed firm’s geographic attain would give it extra clout, with out elaborating. SM, which on Tuesday reported a 70% improve in quarterly working revenue from a yr earlier, unveiled an formidable purpose of hitting 1.2 trillion gained in income by 2025, a 69% rise from this yr’s estimate. Furthermore, the envisioned partnership with Kakao, which operates a division specialising in webtoons and different digital content material, appears promising.
The proxy battle is due for a shareholder vote subsequent month. Within the meantime, SM’s inventory is buying and selling above Hybe’s tender supply, implying that buyers count on the next bid. SM’s CEO, Lee’s nephew, lately accepted duty for the turmoil and stated he would step down. Between a sweeter supply and a much-needed administration shake-up, shareholders must be higher off both approach.
It helps, too, that Okay-pop has become one in all South Korea’s strongest exports, thanks largely to “Butter” and “Dynamite” singers BTS. The band alone had been producing an additional $3.2 billion in tourism and different income yearly for the native financial system, in keeping with a 2018 Hyundai Analysis Institute examine. If SM can hit its 2024 working revenue goal – a giant if – paying a 20% premium to Hybe’s tender supply would theoretically generate an 8% return on funding for a purchaser, Breakingviews calculates, earlier than factoring in any potential value financial savings from a deal.
In a area the place pushback from buyers has skilled some main current setbacks, together with in Japan, this musical saga gives encouraging promise. It additionally exposes a serious shortcoming inside Korea Inc: administrators solely have an obligation to the corporate, not like in the US, the place the pursuits of shareholders additionally require consideration. South Korea’s construction has allowed entrenched bosses to withstand change. In that sense, Okay-pop’s new tune must be a giant hit.
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(The writer is a Reuters Breakingviews columnist. The opinions expressed are her personal.)
CONTEXT NEWS
South Korean music company Hybe stated on Feb. 10 that it plans to purchase as much as a 39.8% stake in rival SM Leisure, together with a 14.8% holding from Lee Soo-man, the corporate’s founder and largest shareholder, and 25% via a young supply.
“We oppose all aggressive exterior mergers and acquisitions, together with Hybe,” SM stated in a press release, in keeping with Reuters. Lee has been in dispute with SM’s present administration over points involving the corporate’s enterprise dealings together with his non-public agency.
As a part of the deal, Hybe, greatest recognized for managing the hit boy band BTS, has agreed to purchase most of Lee’s 18.5% stake for 423 billion gained ($330 million) and is providing 120,000 gained per share within the tender supply, a 22% premium to SM’s closing worth on Feb. 9. If profitable, it will be the most important hostile takeover in South Korea, in keeping with Dealogic knowledge.
Individually, web conglomerate Kakao stated on Feb. 7 it will purchase a 9.05% stake in SM by way of 112 billion gained of recent shares and 105 billion gained of convertible bonds. Lee has tried to dam the deal in court docket, saying the issuance of recent shares to Kakao is “unlawful” and designed to weaken his place as the most important shareholder.
(The writer is a Reuters Breakingviews columnist. The opinions expressed are her personal.)
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