HYBE Attacks SM Entertainment’s Partnership With Kakao

In the latest episode of the battle of K-pop giants, HYBE, the home of BTS, took some swings at SM Entertainment’s business partnership with tech company Kakao, owner of a popular messaging app, Kakao M, and music streaming service Melon.

On Feb. 6, Kakao announced it would purchase a 9.05% stake in SM Entertainment, whose roster includes NCT 127 and Red Velvet. Three days later, HYBE announced it would acquire a 14.8% stake in SM Entertainment by purchasing the majority of shares of the company’s founder and legendary K-pop producer, Lee Soo Man. Following a campaign by an activist investor for SM Entertainment to reduce Lee’s role, the company canceled his producer contract on Dec. 31, 2022.

SM Entertainment called HYBE’s investment “hostile M&A” and said its partnership with Kakao is “the first step” in its long-term transformation plan. HYBE sees SM Entertainment’s relationship with Kakao as one-sided and bad for shareholders.

“The contract between SM and Kakao, which grants acquisition of convertible bonds, undermines shareholder interest,” HYBE said in a statement Friday (Feb. 24). A clause grants Kakao or Kakao Entertainment the ability to “continuously increase its stake in SM” by allocating stocks issued through a paid-in capital increase to a third party, HYBE stated. “This will dilute the value of stocks owned by all shareholders other than Kakao or Kakao Entertainment.”

HYBE further argued the contract would hurt SM Entertainment’s chance of attracting “new strategic investors” and make it easier for Kakao “to seize control of SM’s management rights.”

HYBE also took issue with the Kakao’s role in managing SM Entertainment artists and distributing their music, arguing the contract gives Kakao an “unexpiring, exclusive” right to distribute SM Entertainment’s recorded music and allow Kakao Entertainment to manage SM Entertainment artists in North and South America.

In turn, SM Entertainment subsidiary SM Life Design will produce the recordings of Kakao Entertainment artists and provide a music video shooting set. “Compared with the important business rights that SM is handing over,” HYBE stated, “the return seems unreasonably small.”

After reviewing the contract’s legal issues, HYBE “will take all necessary legal measures, both civil and criminal,” it stated.