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boulevarddoubleOkay. God. It's been a while, but as I mentioned, I wanted to wait for some facts before posting again.
Which we now have! However, I am tired tired person and this whole situation is getting more sad by the day so I apologize if this is less funny and shorter than it might really warrant.
If you're just now getting to the primer, get caught up here:
Parts 1-3 (the backstory)
Part 4 (the Hybe acquisition)
Part 5 (the mudslinging)
Part 6 (the propaganda)
If you want to keep up with this on the daily, follow TMIKpop on twitter.
Usual disclaimer: Not a finance professional. Not a lawyer. Not Korean. Much of this content I read using google translate.
My personal speculation will be in bold, though there will likely be less of that this time around since potential scenarios are spiraling out of control.
So last we left off, the judge had heard the first arguments against the sale of 9% of SM Entertainment (SM) to Kakao. The alliance of Lee Soo Man (LSM) and Hybe were arguing that there was no financial reason to issue completely new stocks and convertible bonds, as SM had plenty of liquid (e.g. cash) reserves, and even if they were to issue new stocks, it was in the SM charter that current shareholders had the right of first refusal to purchase those stocks.
The alliance of the SM Board (including CEO Chris Lee and CFO Jang Cheol Hyuk) were arguing that this was a matter of management style - that it was imperative to move away from LSM as the majority owner because he had completely mismanaged the company and that the money raised would fund their SM 3.0 strategy.
The judge gave them until Feb 28th to submit new arguments and then they would make a ruling.
Through this injunction argument process, however, we learned new facts about the various deals in play.
First, let's tackle the SM/Kakao alliance.
It was revealed shortly after the arguments were made that one of the major investors in Kakao Entertainment (not to be confused with the parent company Kakao) was thinking of pulling their 200 billion (won) investment. Why? Because they had been persuaded to invest because Kakao Ent. was planning on taking over SM.
While there have been lots of concerns around this, this plan had never been confirmed prior.
This company was part of the 1.1 Trillion won raised to "further Kakao's expansion in the KEntertaiment market", including significant investments out of Saudi Arabia, Singapore, and other foreign investment funds. While this has caused much consternation in Korea, this is not unusual in the broader scheme of business. South Korea is a very protectionist nation when it comes to their business and culture, for many valid historical reasons, but it also means that raising foreign funds automatically puts people on the defensive.
However, the fact finding doesn't stop there. The big news out of the injunction hearing was that the full scope of the Kakao/SM partnership was revealed. And it includes a clause that gave Kakao future first refusal rights for new stock sales - above and beyond those held by other shareholders.
Good money bets that this is how they had initially planned on becoming the majority shareholder in SM. Now, this is unusual, and frankly, quite shady.
Naturally, Hybe had some objections to this clause, and Kakao waved them off like "this is just to protect the business' value."
Sure, Jan.
It's important to remember that the partnership with Kakao has already gone into effect, regardless of Hybe's new status as majority shareholder, as it is, very technically, independent of the sale of shares, and therefore not impacted by the injunction.
The contract also gives Kakao exclusive rights to distribute SM music, which was covered in the official SM 3.0 videos, and this is the part that has already begun.
We're not done, though. It's also believed that Kakao has been snapping up shares of SM stock on the open market, somewhere to the tune of ~6%. As you may remember, SM stock has been trading above the 120k of Hybe's tender offer this whole time. Analysts also believe that Kakao may also be preparing for a tender offer in the 140-150k range with the help of the additional funding they are bringing in.
Once again, Hybe was pissed. They have made accusations that Kakao/SM are manipulating the market to drive the stock price up, and requested the FSS (the Korean SEC) investigate the bulk purchases Kakao was making through third-party and shell companies.
As far as I know, these kinds of bulk purchases through brokers aren't illegal. It's more likely Kakao is simply trying to keep their cards close to their chest until the March 31st shareholders meeting.
Outside of their performative outrage, Hybe wasn't completely quiet.
First, it was revealed that Hybe paid an additional 70 billion to LSM for his stake in various SM subsidiaries beyond the purchases we even knew about. This included a contract for 10B won to support LSM's "tree planting" project.
This led to a lot of criticism, that they weren't optimizing for shareholder value either as they paid more than the actual value of those stakes, and that they were willing to take any deal to get their hands on SM Entertainment.
Which, duh.
It also led to one of the best protest slogans ever: Go plant trees with Interpol's most wanted
Hybe wasn't done with their PR campaign, however. On March 3rd, Bang Si Hyuk, Chairman of the Hybe Board, better known to Kpop fans as Bang PD, went on CNN Business to declare they aren't trying to to "take over the whole industry".
Again, sure, Jan. Mostly, I'm seeing people be very skeptical of this interview, as they should be. It's an incredibly self-serving piece of PR that's attempting to set them up as the saviors of Kpop. Shockingly, the CNN article linked above is possibly the best English-language summation of the situation from an actual journalism outlet I've seen, though it doesn't mention the Kakao connection.
The one piece I want to address that seems to be causing some misunderstanding is that Bang says the KPop is basically being outlapped by other music industries/genres. Which is probably true.
According to South Korean economists, while Kpop is still growing in total sales, the rate of growth has slowed significantly. We can both acknowledge this and still recognize that while Bang PD may be an expert in the field, he's absolutely on a propaganda tour.
Okay. That's everything that has happened while we were waiting for the judge.
Also on March 3rd, the ruling came down.
LSM wins the injunction. SM is not allowed to issue Kakao the 9% of new shares and convertible bonds.
Both LSM and Hybe issued statements post victory, but they can be summed up as wanking motion.
So, what now?
We should learn soon (probably tonight or tomorrow) what the outcome of the Hybe tender offer was. We all saw the stock price stay quite high, but we know that at least one minority shareholder sold their ~1% to Hybe.
But this is where I stop speculating. The next important date in this fight is March 31st, the general shareholder's meeting.
Because the Hybe tender isn't likely to net them the 40% they were after, it is possible this vote -- which is how the Board of Directors is elected, and therefore the management of SM Entertainment is determined -- is extremely contentious.
Last year, Align Partners (again only owning ~1% of shares themselves) managed to rally ~33% of the shareholder votes to kick off their campaign against LSM. Right now it's believed that Hybe only has a guarantee of around 23% of the vote, which is probably not enough to set themselves up in an unimpeachable position of management.
As for Kakao, who knows! Without that 9%, it will be very difficult for them to purchase enough shares through the open market/a tender offer to grab that super-majority necessary to strip Hybe of management rights.
And just because this tender offer failed, it doesn't prevent Hybe from making another. But do they wait and see what happens with the board, when their position could be further weakened?
I genuinely have no idea.
Smart money says that Kakao throws in the towel and goes after a different acquisition, but in what part of this whole saga has any one of these players done the smart thing???
And that is all the updates as of March 5, 2023, 10AM MST
Which we now have! However, I am tired tired person and this whole situation is getting more sad by the day so I apologize if this is less funny and shorter than it might really warrant.
If you're just now getting to the primer, get caught up here:
Parts 1-3 (the backstory)
Part 4 (the Hybe acquisition)
Part 5 (the mudslinging)
Part 6 (the propaganda)
If you want to keep up with this on the daily, follow TMIKpop on twitter.
Usual disclaimer: Not a finance professional. Not a lawyer. Not Korean. Much of this content I read using google translate.
My personal speculation will be in bold, though there will likely be less of that this time around since potential scenarios are spiraling out of control.
So last we left off, the judge had heard the first arguments against the sale of 9% of SM Entertainment (SM) to Kakao. The alliance of Lee Soo Man (LSM) and Hybe were arguing that there was no financial reason to issue completely new stocks and convertible bonds, as SM had plenty of liquid (e.g. cash) reserves, and even if they were to issue new stocks, it was in the SM charter that current shareholders had the right of first refusal to purchase those stocks.
The alliance of the SM Board (including CEO Chris Lee and CFO Jang Cheol Hyuk) were arguing that this was a matter of management style - that it was imperative to move away from LSM as the majority owner because he had completely mismanaged the company and that the money raised would fund their SM 3.0 strategy.
The judge gave them until Feb 28th to submit new arguments and then they would make a ruling.
Through this injunction argument process, however, we learned new facts about the various deals in play.
First, let's tackle the SM/Kakao alliance.
It was revealed shortly after the arguments were made that one of the major investors in Kakao Entertainment (not to be confused with the parent company Kakao) was thinking of pulling their 200 billion (won) investment. Why? Because they had been persuaded to invest because Kakao Ent. was planning on taking over SM.
While there have been lots of concerns around this, this plan had never been confirmed prior.
This company was part of the 1.1 Trillion won raised to "further Kakao's expansion in the KEntertaiment market", including significant investments out of Saudi Arabia, Singapore, and other foreign investment funds. While this has caused much consternation in Korea, this is not unusual in the broader scheme of business. South Korea is a very protectionist nation when it comes to their business and culture, for many valid historical reasons, but it also means that raising foreign funds automatically puts people on the defensive.
However, the fact finding doesn't stop there. The big news out of the injunction hearing was that the full scope of the Kakao/SM partnership was revealed. And it includes a clause that gave Kakao future first refusal rights for new stock sales - above and beyond those held by other shareholders.
Good money bets that this is how they had initially planned on becoming the majority shareholder in SM. Now, this is unusual, and frankly, quite shady.
Naturally, Hybe had some objections to this clause, and Kakao waved them off like "this is just to protect the business' value."
Sure, Jan.
It's important to remember that the partnership with Kakao has already gone into effect, regardless of Hybe's new status as majority shareholder, as it is, very technically, independent of the sale of shares, and therefore not impacted by the injunction.
The contract also gives Kakao exclusive rights to distribute SM music, which was covered in the official SM 3.0 videos, and this is the part that has already begun.
We're not done, though. It's also believed that Kakao has been snapping up shares of SM stock on the open market, somewhere to the tune of ~6%. As you may remember, SM stock has been trading above the 120k of Hybe's tender offer this whole time. Analysts also believe that Kakao may also be preparing for a tender offer in the 140-150k range with the help of the additional funding they are bringing in.
Once again, Hybe was pissed. They have made accusations that Kakao/SM are manipulating the market to drive the stock price up, and requested the FSS (the Korean SEC) investigate the bulk purchases Kakao was making through third-party and shell companies.
As far as I know, these kinds of bulk purchases through brokers aren't illegal. It's more likely Kakao is simply trying to keep their cards close to their chest until the March 31st shareholders meeting.
Outside of their performative outrage, Hybe wasn't completely quiet.
First, it was revealed that Hybe paid an additional 70 billion to LSM for his stake in various SM subsidiaries beyond the purchases we even knew about. This included a contract for 10B won to support LSM's "tree planting" project.
This led to a lot of criticism, that they weren't optimizing for shareholder value either as they paid more than the actual value of those stakes, and that they were willing to take any deal to get their hands on SM Entertainment.
Which, duh.
It also led to one of the best protest slogans ever: Go plant trees with Interpol's most wanted
Hybe wasn't done with their PR campaign, however. On March 3rd, Bang Si Hyuk, Chairman of the Hybe Board, better known to Kpop fans as Bang PD, went on CNN Business to declare they aren't trying to to "take over the whole industry".
Again, sure, Jan. Mostly, I'm seeing people be very skeptical of this interview, as they should be. It's an incredibly self-serving piece of PR that's attempting to set them up as the saviors of Kpop. Shockingly, the CNN article linked above is possibly the best English-language summation of the situation from an actual journalism outlet I've seen, though it doesn't mention the Kakao connection.
The one piece I want to address that seems to be causing some misunderstanding is that Bang says the KPop is basically being outlapped by other music industries/genres. Which is probably true.
According to South Korean economists, while Kpop is still growing in total sales, the rate of growth has slowed significantly. We can both acknowledge this and still recognize that while Bang PD may be an expert in the field, he's absolutely on a propaganda tour.
Okay. That's everything that has happened while we were waiting for the judge.
Also on March 3rd, the ruling came down.
LSM wins the injunction. SM is not allowed to issue Kakao the 9% of new shares and convertible bonds.
Both LSM and Hybe issued statements post victory, but they can be summed up as wanking motion.
So, what now?
We should learn soon (probably tonight or tomorrow) what the outcome of the Hybe tender offer was. We all saw the stock price stay quite high, but we know that at least one minority shareholder sold their ~1% to Hybe.
But this is where I stop speculating. The next important date in this fight is March 31st, the general shareholder's meeting.
Because the Hybe tender isn't likely to net them the 40% they were after, it is possible this vote -- which is how the Board of Directors is elected, and therefore the management of SM Entertainment is determined -- is extremely contentious.
Last year, Align Partners (again only owning ~1% of shares themselves) managed to rally ~33% of the shareholder votes to kick off their campaign against LSM. Right now it's believed that Hybe only has a guarantee of around 23% of the vote, which is probably not enough to set themselves up in an unimpeachable position of management.
As for Kakao, who knows! Without that 9%, it will be very difficult for them to purchase enough shares through the open market/a tender offer to grab that super-majority necessary to strip Hybe of management rights.
And just because this tender offer failed, it doesn't prevent Hybe from making another. But do they wait and see what happens with the board, when their position could be further weakened?
I genuinely have no idea.
Smart money says that Kakao throws in the towel and goes after a different acquisition, but in what part of this whole saga has any one of these players done the smart thing???
And that is all the updates as of March 5, 2023, 10AM MST
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Date: 2023-03-05 06:00 pm (UTC)no subject
Date: 2023-03-05 06:50 pm (UTC)