As HYBE eyes a $900m stake in Okay-pop rival, SM Leisure slams BTS firm’s ‘hostile takeover try’

The rise of Okay-Pop has seen its house nation of South Korea change into one of the vital influential markets within the trendy hit-making music business.

There’s a serious rift stewing between two of the market’s key gamers, nevertheless, that might have a seismic impression on South Korea’s leisure enterprise for years to return.

Two weeks in the past, HYBE, the corporate behind BTS, acquired a 14.8% stake in its rival SM Leisure (behind stars like NCT, EXO and Aespa)  from SM’s founder Lee Soo Man, in a deal value 422.8 billion South Korean gained (approx. USD $334.5 million).

Because of this, HYBE grew to become SM’s largest shareholder.

It proved to be a very acquisitive few days for the Okay-Pop large globally, with HYBE America, led by Scooter Braun, agreeing that very same week to purchase Atlanta rap powerhouse QC Media Holdings or High quality Management, house to acts similar to Lil Child, Migos, Lil Yachty and Metropolis Ladies.

As reported by All Okay-Pop, following its acquisition of Lee Soo Man’s SM Leisure shares, HYBE revealed in a submitting that it supposed to up its 14.8% stake in SM to round 40% of the corporate.

HYBE reportedly deliberate to take action by buying one other 25.2% of SM Leisure’s shares for a complete of 1.14 trillion South Korea Gained (USD $900 million USD) from minority shareholders, launching a young supply to take action.

SM Leisure’s present administration, nevertheless, shouldn’t be joyful about this chance.

Over the weekend, Jang Cheol Hyuk, the CFO of SM Leisure, printed a video on YouTube during which he slammed HYBE’s current takeover bid, arguing that it will result in the latter firm’s monopolization of the Okay-Pop business.

He defined intimately why SM Leisure’s administration opposes a takeover by HYBE – noting specifically that he believes HYBE artists will probably be prioritized over SM Leisure artists if the corporations had been to be mixed.

Honing in on the competitors claims, SM’s CFO says that if HYBE and SM Leisure had been to be mixed, “the mixed entity would create a monopoly by taking 66% of the overall [Korean music] market income”.

He added that as of Q3 2022, the 2 corporations’ mixed earnings derived from each albums and digital music “account for 70% of the [domestic] market”.

Stated SM’s Jang Cheol Hyuk: “Lots of indicators of market share suggest that HYBE’s acquisition of SM will undermine truthful competitors, which clearly exhibits that this acquisition is unfair.”

“The monopoly created on account of HYBE’s hostile acquisition of SM will trigger extra various and direct issues, together with decreased range of artists, music and concert events.”

Jang Cheol hyuk, SM Leisure

Elsewhere within the video, Jang Cheol Hyuk argued that HYBE’s tender supply to accumulate an approximate 40% stake in SM Leisure is “clearly a hostile takeover try that has not been consulted with the present administration and board”.

He added: “Via this try for hostile takeover, HYBE appears to plan to train the administration management by dominating the board of administrators.”

He added that “HYBE has taken benefit of its place within the Okay-pop market to virtually double the live performance ticket costs as reported within the information a number of occasions lately”.

Jang Cheol Hyuk continued: “HYBE is elevating not solely its personal live performance ticket costs but additionally these of the labels it has acquired, which illustrates the impression monopoly can have on the business. The consolidation of SM and HYBE will speed up ticket value will increase, including burden to followers who love and assist Okay-pop and Okay-pop artists. Live performance ticket value hike[s[ is just one example.

“The monopoly created as a result of HYBE’s hostile acquisition of SM will cause more diverse and direct problems, including decreased diversity of artists, music and concerts.”

Immediately after the news of HYBE’s 14.8% stake purchase in SM was announced a fortnight ago, the latter company issued a statement saying that it “oppose[s] all aggressive outdoors mergers and acquisitions together with HYBE”.

So if SM Leisure’s administration is elevating the alarm over the potential of HYBE shopping for extra of its firm, why did SM Leisure’s founder – Lee Soo Man – promote HYBE his shares within the first place?

It’s truthful to say that inside company rigidity is brewing between SM Leisure’s administration and its founder.

HYBE’s deal got here a number of days after we discovered that South Korea-based Kakao Corp had acquired its personal 9.05% stake in Okay-Pop large SM Leisure, in a deal value 217.2 billion gained ($172.8 million).

Lee Soo Man subsequently stated he deliberate to file a lawsuit in opposition to the corporate following the Kakao deal.

And final week, the co-CEO of SM Leisure, Lee Sung-soo, issued an announcement through YouTube leveling numerous allegations in opposition to (SM founder) Lee Soo Man, starting from “greed’ to offshore tax avoidance.

In the meantime, South Korea’s competitors regulator, the Korea Truthful Commerce Fee (KFTC), has been protecting an in depth eye on HYBE’s intention to accumulate extra shares in SM Leisure.

Im Kyeong-hwan, the pinnacle of the worldwide M&A division of the competitors watchdog, instructed Reuters final week: “Although there have been acquisition offers involving small and medium-sized leisure companies, a deal on this scale is a primary for us.”

SM Leisure generated revenues of 256.4 billion South Korea Gained  (USD $197.7 million) within the three months to finish of December 2022, in accordance with a monetary assertion printed by the agency immediately (February 20).

That was up 18.2% YoY, in accordance with the submitting (see under).

Information of Kakao’s funding in SM Leisure coincided with the announcement that SM Leisure was planning to determine a number of manufacturing facilities and a multi-label system as a part of a brand new development technique, dubbed SM 3.0.

Reuters reported that SM was planning to make use of the funds raised via the preliminary Kakao deal to fund this new technique.

SM Leisure’s CFO stated in his assertion that the corporate plans to double down on its SM 3.0 technique and that additional particulars will probably be printed quickly alongside a “new IP monetization mannequin” in addition to efficiency targets.

You’ll be able to learn SM Leisure’s CFO’s transcribed assertion in full (translated to English under)…

Hello, I’m Jang Cheol Hyuk, CFO of SM Leisure.

On February 3, we SM, took step one towards our new leap ahead for our followers, artists, shareholders and workers, by saying “SM 3.0 targeted on the change to the Multi ‘Manufacturing Heart, Label’ system.” As quickly as SM’s new imaginative and prescient “SM 3.0” was introduced, the biggest shareholder offered his stake, and a hostile takeover try by a competitor began.

That is an try that ignores not solely the fierce deliberation and efforts of the 600 SM workers who’ve dreamed of changing into the No.1 leisure firm on the planet, but additionally the values and satisfaction of SM that it has pursued along with the followers and artists. Right this moment, we wish to inform you intimately about SM Leisure’s place on the present state of affairs.

On February 9, HYBE grew to become SM’s largest shareholder by buying 14.8% of SM’s stake held by government producer Soo-Man Lee, the corporate’s former largest shareholder. HYBE has additionally introduced that it will finally purchase ~40% stake via a young supply at present underway.

That is clearly a “hostile takeover try” that has not been consulted with the present administration and board. Via this try for hostile takeover, HYBE appears to plan to train the administration management by dominating the board of administrators. We all know higher than anybody else that beneath such a governance construction, it’s troublesome to make choices that prioritize the worth of all SM shareholders, together with the remaining 60%.

This is identical as returning to the unsuitable previous of ‘SM for a sure shareholder’, which we’ve got been making an attempt so arduous to interrupt free from. HYBE’s CEO stated he’ll guarantee impartial administration of SM, however I can inform you how empty this promise is and the way troublesome that promise is to maintain. HYBE has not made any requests for due diligence materials to SM throughout the M&A disclosure course of. In keeping with HYBE’s disclosure on tender providing and buy of outdated shares, over 1 trillion gained of capital will probably be infused into this deal.

And HYBE goes to take out a short-term mortgage to finance this deal. Within the case of such large-scale borrowing, it ought to have been an merchandise for deliberation and voting at HYBE’s BOD, nevertheless, it’s a thriller how the BOD resolved an merchandise that entails funding of over 1 Tr Gained with no due diligence. It’s thought-about a typical sense and regular apply within the case of an M&A deal this measurement to bear a monetary audit or authorized due diligence primarily based on the information offered by the goal firm for merger earlier than any buying settlement is signed. On this regard, we expect that HYBE’s company governance is much from sound or rational.

If HYBE takes over SM, it’s inevitable that SM will probably be topic to such weak governance. I wish to level out a few of the points that might probably come up if the guardian firm turns into a enterprise competitor. With the optimum album launch time restricted to 100 occasions a 12 months, HYBE is already saturated with artists from its labels. Because of this, SM artists can have no alternative however to be placed on a decrease precedence. As well as, SM will quit the fan platform enterprise aspired by SM 3.0 and use the HYBE platform. Such a platform will merely enhance some licensing income however not be correctly mirrored within the company worth. Because of this, SM will lose a brand new development engine by lacking out on the information that may assist deepen [our] understanding [of] followers. Lastly, new enterprise alternatives which may assist SM 3.0 technique will probably be extremely more likely to be allotted to HYBE’s wholly-owned subsidiary.

Along with the examples talked about, there have to be many points that can’t be addressed by the flawed governance construction the place a competitor turns into SM’s guardian firm. I’m assured that this path is not going to be the very best for SM Leisure and its shareholders. Some say that there can be a synergy if SM artists joins HYBE’s Weverse platform. Nonetheless, as talked about earlier than, this might merely create further earnings for HYBE with none advantages for SM. Slightly, such a transfer would deprive SM of a chance to run its personal platform enterprise. HYBE at present has a separate enterprise unit that monetizes IP held by its affiliated labels.

This implies HYBE, not SM, would take the initiative in working the SM-owned IP and SM’s future earnings can be subordinate to HYBE. HYBE says it is going to purchase former government producer Soo-Man Lee’s stakes in SM Model Advertising and marketing in addition to his shares in DREAM MAKER. It insists that this goals at bettering SM’s governance construction. Nonetheless, the consumer of SM Model Advertising and marketing and DREAM MAKER is in impact restricted to SM Leisure. The worth of those two corporations was created due to SM Leisure, due to this fact, the SM shareholders must be entitled to the worth of the shares.

On this regard, it’s inevitable to interpret HYBE’s buy of the 2 corporations’ shares as a transfer to offer further premium to Soo-Man Lee, finally resulting in the monetary lack of SM shareholders. As well as, whereas the companies of those corporations are in competitors with Weverse, there isn’t a clarification on how the companies of those corporations can be carried out after buying the shares held by producer Soo-Man Lee. This solely will increase the possibility of the worth of those corporations being handed over to HYBE, whereas having no impression on the development of SM’s governance construction. HYBE says it is going to “create a robust synergy in numerous enterprise areas by buying SM”. Nonetheless, HYBE has not specified what synergy it’s and has not clarified the importance of the acquisition for SM’s shareholders. We urge HYBE to make clear what synergy the acquisition would create for SM and to obviously state whether or not this might be benefiting the shareholders of HYBE or these of SM. SM and HYBE are the highest two, main leisure companies which are main the Korean leisure market scene.

If the 2 corporations are built-in, the mixed entity would create a monopoly by taking 66% of the overall market income. Moreover, as of Q3 2022, the 2 corporations’ mixed earnings from albums/digital music account for 70% of the market. Relating to live performance/efficiency revenue, the 2 corporations took up as a lot as 89%.

Because of an integration, over 60% of the top-ranking artists by album gross sales can be beneath a single firm, undermining the range of the Okay-pop market. Lots of indicators of market share suggest that HYBE’s acquisition of SM will undermine truthful competitors, which clearly exhibits that this acquisition is unfair. Within the Korean leisure market, the artists have put of their highest endeavors whereas the leisure companies have engaged in constructive competitors.

This has enabled Okay-pop to realize its present world recognition and fandom. Nonetheless, If HYBE takes the vast majority of the market share by buying SM’s managerial rights, Okay-pop would lose alternatives for a higher development ahead. Finally, Okay-pop followers would be the ones that will probably be most affected by the monopoly. SM places cheap costs to live performance tickets to permit broader scope of followers to get pleasure from cultural performances. In the meantime, HYBE has taken benefit of its place within the Okay-pop market to virtually double the live performance ticket costs as reported within the information a number of occasions lately. HYBE is elevating not solely its personal live performance ticket costs but additionally these of the labels it has acquired, which illustrates the impression monopoly can have on the business. The consolidation of SM and HYBE will speed up ticket value enhance, including burden to followers who love and assist Okay-pop and Okay-pop artists. The live performance ticket value hike is only one instance.

The monopoly created on account of HYBE’s hostile acquisition of SM will trigger extra various and direct issues, together with decreased range of artists, music and concert events. I’ve talked in regards to the unfavorable penalties HYBE’s hostile takeover could have on the shareholders, followers and furthermore, the Okay-pop market as an entire.

However along with the ‘end result’, I wish to discuss in regards to the issues discovered within the technique of the hostile takeover. Throughout HYBE’s SM share buy course of, buy of the shares held by the biggest shareholder and the tender providing had been deliberate concurrently and had been introduced on the identical day. Buy of the outdated shares and the tender providing have to be thought-about as the identical deal, and it needed to undergo preliminary examination of the Truthful Commerce Fee. Nonetheless, because it didn’t bear a preliminary examination, it’s problematic. If HYBE secures greater than 15% of the shares via buy of outdated shares and tender providing on Mar sixth, they should shut the reporting of company consolidation by Apr fifth, which is 30 days after the acquisition date. This could solely be considered as a pre-calculated plan to safe shares first then have an advantageous place on the SM Shareholder’s Assembly earlier than present process the preliminary examination by the Truthful Commerce Fee. Even when the shares are bought, the Truthful Commerce Fee examination will function a danger for SM’s future.

If the company consolidation is rejected because of the cause of monopoly, numerous SM shares will probably be launched into the market, resulting in a plummeting share value. If a conditional approval for company consolidation is granted, there’s a chance that HYBE will scale back the dimensions of the SM, the acquired firm’s enterprise, to execute corrective measures prescribed by the Truthful Commerce Fee. Even when approval is granted, the delay within the examination course of will create a setback for SM in executing its enterprise technique. Voices of most workers who’ve constructed SM collectively are expressing resistance to HYBE’s hostile takeover. In keeping with an nameless worker survey, 85% of workers oppose SM being absorbed by HYBE. HYBE’s hostile takeover is an act of ignoring the efforts of the workers who’re working day and evening, and the workers are voicing that they really feel “the custom and historical past of SM are being denied” and their “satisfaction has collapsed”.

As one of many workers, I’m additionally feeling empty and anxious together with my colleagues, and as CFO, I really feel an amazing sense of duty to resolve this case. We need to be clear once more that as within the assertion launched on February tenth, 25 SM executives, together with the CEOs, oppose  HYBE’s hostile takeover for the sake of shareholders, followers, the Okay-pop business, and workers. Hostile takeover circumstances that passed off in opposition to the opinions of the BOD and the corporate, present in Korea in addition to different international locations, ended up destroying the enterprise efficiency of the corporate and finally broken shareholder worth. Even 100% share buy circumstances discovered abroad, confirmed the identical outcomes. SM will proceed to oppose  hostile takeovers by sure main shareholders/teams whose enterprise pursuits could adversely have an effect on SM and can do our greatest to guard shareholder rights by establishing a sound and clear governance construction.

SM’s 2022 efficiency will probably be introduced quickly. We will probably be explaining the SM 3.0 enterprise technique, a brand new IP monetization mannequin following the beforehand introduced “Multi Manufacturing Heart/Multi Label” technique, together with efficiency targets. Together with the SM 3.0 abroad technique and funding technique, we’ll share the enterprise efficiency and company worth targets of all SM associates. SM is not going to solely reinforce its current IP enterprise by implementing SM 3.0 but additionally establish new development engines to comprehend revaluation out there and return the worth to the shareholders to create larger company worth, which will probably be settled as a virtuous cycle. I’m positive a lot of you shareholders try to determine what to do with the tender supply proposal by HYBE. I feel it will be helpful for our shareholders to not reply to the tender supply. As a result of the adjustments that will probably be led to by SM 3.0 will probably be of far higher worth to the shareholders.

The share value of SM has already exceeded the tender supply value designated by HYBE, which is 120,000 Gained and when SM 3.0 is realized, costs will go up even additional. We’ll present the small print of SM 3.0 to you earlier than the deadline of software for the tender supply. Please defer your resolution till after you’ve heard the small print. On a separate notice, the strategic partnership with Kakao, which the market is keenly enthusiastic about will probably be disclosed intimately in our subsequent announcement.

At this cut-off date when we’ve got simply taken step one towards SM 3.0, our executives and workers are dismayed and disheartened by the biggest shareholder’s stake sale and competitor’s hostile takeover try. This try is ignoring all of SM’s arduous work and efforts, in addition to the values that SM has pursued along with its artists. We’re properly conscious of Soo-Man Lee’s contribution to SM as founder and government producer. SM’s BOD has decided to change into the BOD for all its shareholders whereas defending the dignity of Soo-Man Lee and SM’s legacy in addition to making ready for the brand new leap for all our shareholders. That’s the reason Soo-Man Lee’s resolution got here as an even bigger shock. The function of our administration group is to work for SM workers and artists, in addition to for followers and shareholders.

This is not going to change and mustn’t change beneath any circumstance. So long as our followers and shareholders imagine in us, SM is not going to cease taking a brand new leap ahead. Please sit up for and take note of our subsequent announcement concerning the SM 3.0 technique which can improve fan and shareholder worth. Thanks.

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