The rise of Okay-Pop has seen its dwelling nation of South Korea grow to be one of the influential markets within the trendy hit-making music trade.
There’s a significant rift stewing between two of the market’s key gamers, nonetheless, that would have a seismic affect on South Korea’s leisure enterprise for years to come back.
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 received (approx. USD $334.5 million).
In consequence, HYBE turned 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 acquire Atlanta rap powerhouse QC Media Holdings or Quality Control, dwelling to acts corresponding 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 filing that it meant 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 Received (USD $900 million USD) from minority shareholders, launching a young provide to take action.
SM Leisure’s present administration, nonetheless, is just not pleased about this chance.
Over the weekend, Jang Cheol Hyuk, the CFO of SM Leisure, revealed a video on YouTube by which he slammed HYBE’s current takeover bid, arguing that it will result in the latter firm’s monopolization of the Okay-Pop trade.
He defined intimately why SM Leisure’s administration opposes a takeover by HYBE – noting particularly that he believes HYBE artists will likely be prioritized over SM Leisure artists if the companies 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 firms’ mixed earnings derived from each albums and digital music “account for 70% of the [domestic] market”.
Mentioned SM’s Jang Cheol Hyuk: “A variety of indicators of market share suggest that HYBE’s acquisition of SM will undermine honest competitors, which clearly reveals that this acquisition is unfair.”
“The monopoly created because of HYBE’s hostile acquisition of SM will trigger extra numerous 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 provide 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: “By 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 nearly double the live performance ticket costs as reported within the information a number of occasions not too long ago”.
Jang Cheol Hyuk continued: “HYBE is elevating not solely its personal live performance ticket costs but in addition these of the labels it has acquired, which illustrates the affect monopoly could have on the trade. The consolidation of SM and HYBE will speed up ticket worth will increase, including burden to followers who love and assist Okay-pop and Okay-pop artists. Live performance ticket worth 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 honest to say that internal corporate tension is brewing between SM Leisure’s administration and its founder.
HYBE’s deal got here just a few days after we realized 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 received ($172.8 million).
Lee Soo Man subsequently mentioned he deliberate to file a lawsuit towards the corporate following the Kakao deal.
And final week, the co-CEO of SM Leisure, Lee Sung-soo, issued a statement by way of YouTube leveling varied allegations towards (SM founder) Lee Soo Man, starting from “greed’ to offshore tax avoidance.
In the meantime, South Korea’s competitors regulator, the Korea Honest Commerce Fee (KFTC), has been protecting a detailed eye on HYBE’s intention to accumulate extra shares in SM Leisure.
Im Kyeong-hwan, the top of the worldwide M&A division of the competitors watchdog, told 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 Received (USD $197.7 million) within the three months to finish of December 2022, in keeping with a monetary assertion revealed by the agency at the moment (February 20).
That was up 18.2% YoY, in keeping 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 by means of the preliminary Kakao deal to fund this new technique.
SM Leisure’s CFO mentioned in his assertion that the corporate plans to double down on its SM 3.0 technique and that additional particulars will likely be revealed 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 staff, 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 most important 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 staff who’ve dreamed of turning into the No.1 leisure firm on the earth, but in addition the values and satisfaction of SM that it has pursued along with the followers and artists. Right now, we wish to inform you intimately about SM Leisure’s place on the present scenario.
On February 9, HYBE turned SM’s largest shareholder by buying 14.8% of SM’s stake held by govt producer Soo-Man Lee, the corporate’s former largest shareholder. HYBE has additionally introduced that it will finally purchase ~40% stake by means of a young provide at the moment underway.
That is clearly a “hostile takeover try” that has not been consulted with the present administration and board. By 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 below such a governance construction, it’s tough to make choices that prioritize the worth of all SM shareholders, together with the remaining 60%.
This is similar as returning to the improper previous of ‘SM for a sure shareholder’, which we’ve got been making an attempt so onerous to interrupt free from. HYBE’s CEO mentioned he’ll guarantee impartial administration of SM, however I can inform you how empty this promise is and the way tough that promise is to maintain. HYBE has not made any requests for due diligence materials to SM through the M&A disclosure course of. In accordance with HYBE’s disclosure on tender providing and buy of outdated shares, over 1 trillion received of capital will likely 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, nonetheless, it’s a thriller how the BOD resolved an merchandise that entails funding of over 1 Tr Received and not using a due diligence. It’s thought-about a standard sense and regular apply within the case of an M&A deal this measurement to endure a monetary audit or authorized due diligence primarily based on the info offered by the goal firm for merger earlier than any buying settlement is signed. On this regard, we predict that HYBE’s company governance is much from sound or rational.
If HYBE takes over SM, it’s inevitable that SM will likely be topic to such weak governance. I wish to level out a number of the points that would presumably come up if the dad or mum firm turns into a enterprise competitor. With the optimum album launch time restricted to 100 occasions a yr, HYBE is already saturated with artists from its labels. In consequence, SM artists could 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. In consequence, SM will lose a brand new development engine by lacking out on the info that may assist deepen [our] understanding [of] followers. Lastly, new enterprise alternatives that may assist SM 3.0 technique will likely be extremely prone to be allotted to HYBE’s wholly-owned subsidiary.
Along with the examples talked about, there should be many points that can’t be addressed by the flawed governance construction the place a competitor turns into SM’s dad or mum firm. I’m assured that this path is not going to be one of the best for SM Leisure and its shareholders. Some say that there could be a synergy if SM artists joins HYBE’s Weverse platform. Nevertheless, as talked about earlier than, this is able to merely create further earnings for HYBE with none advantages for SM. Relatively, such a transfer would deprive SM of a possibility to run its personal platform enterprise. HYBE at the moment 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 could be subordinate to HYBE. HYBE says it should purchase former govt producer Soo-Man Lee’s stakes in SM Model Advertising in addition to his shares in DREAM MAKER. It insists that this goals at enhancing SM’s governance construction. Nevertheless, the consumer of SM Model Advertising and DREAM MAKER is in impact restricted to SM Leisure. The worth of those two firms was created due to SM Leisure, subsequently, 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 firms’ 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 firms are in competitors with Weverse, there isn’t any clarification on how the companies of those firms could be carried out after buying the shares held by producer Soo-Man Lee. This solely will increase the prospect of the worth of those firms being handed over to HYBE, whereas having no affect on the advance of SM’s governance construction. HYBE says it should “create a powerful synergy in varied enterprise areas by buying SM”. Nevertheless, 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 is able to be benefiting the shareholders of HYBE or these of SM. SM and HYBE are the highest two, main leisure companies which can be main the Korean leisure market scene.
If the 2 firms 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 firms’ mixed earnings from albums/digital music account for 70% of the market. Relating to live performance/efficiency revenue, the 2 firms took up as a lot as 89%.
Because of an integration, over 60% of the top-ranking artists by album gross sales could be below a single firm, undermining the range of the Okay-pop market. A variety of indicators of market share suggest that HYBE’s acquisition of SM will undermine honest competitors, which clearly reveals 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 attain its present international reputation and fandom. Nevertheless, If HYBE takes the vast majority of the market share by buying SM’s managerial rights, Okay-pop would lose alternatives for a better development ahead. Finally, Okay-pop followers would be the ones that will likely 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 nearly double the live performance ticket costs as reported within the information a number of occasions not too long ago. HYBE is elevating not solely its personal live performance ticket costs but in addition these of the labels it has acquired, which illustrates the affect monopoly could have on the trade. The consolidation of SM and HYBE will speed up ticket worth enhance, including burden to followers who love and assist Okay-pop and Okay-pop artists. The live performance ticket worth hike is only one instance.
The monopoly created because of HYBE’s hostile acquisition of SM will trigger extra numerous and direct issues, together with decreased range of artists, music and concert events. I’ve talked concerning the unfavourable penalties HYBE’s hostile takeover could have on the shareholders, followers and furthermore, the Okay-pop market as a complete.
However along with the ‘consequence’, I wish to discuss concerning the issues discovered within the strategy of the hostile takeover. Throughout HYBE’s SM share buy course of, buy of the shares held by the most important 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 should be thought-about as the identical deal, and it needed to undergo preliminary examination of the Honest Commerce Fee. Nevertheless, because it didn’t endure a preliminary examination, it’s problematic. If HYBE secures greater than 15% of the shares by means of 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 will solely be seen 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 Honest Commerce Fee. Even when the shares are bought, the Honest Commerce Fee examination will function a threat for SM’s future.
If the company consolidation is rejected because of the motive of monopoly, numerous SM shares will likely be launched into the market, resulting in a plummeting share worth. 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 Honest 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 staff who’ve constructed SM collectively are expressing resistance to HYBE’s hostile takeover. In accordance with an nameless worker survey, 85% of staff 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 staff, I’m additionally feeling empty and anxious together with my colleagues, and as CFO, I really feel a terrific sense of duty to resolve this example. 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 trade, and staff. Hostile takeover circumstances that came about towards 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 likely be introduced quickly. We will likely 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 present IP enterprise by implementing SM 3.0 but in addition determine new development engines to appreciate revaluation available in the market and return the worth to the shareholders to create greater company worth, which will likely be settled as a virtuous cycle. I’m positive lots of you shareholders try to determine what to do with the tender provide proposal by HYBE. I feel it will be useful for our shareholders to not reply to the tender provide. As a result of the adjustments that will likely be caused by SM 3.0 will likely be of far better worth to the shareholders.
The share worth of SM has already exceeded the tender provide worth designated by HYBE, which is 120,000 Received and when SM 3.0 is realized, costs will go up even additional. We’ll present the main points of SM 3.0 to you earlier than the deadline of software for the tender provide. Please defer your determination till after you could have heard the main points. On a separate word, the strategic partnership with Kakao, which the market is keenly curious about will likely 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 staff are dismayed and disheartened by the most important shareholder’s stake sale and competitor’s hostile takeover try. This try is ignoring all of SM’s onerous 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 govt producer. SM’s BOD has decided to grow to be 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 determination got here as an even bigger shock. The function of our administration group is to work for SM staff and artists, in addition to for followers and shareholders.
This is not going to change and mustn’t change below any circumstance. So long as our followers and shareholders consider 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 relating to the SM 3.0 technique which can improve fan and shareholder worth. Thanks.
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