Regulator watches as K-pop agencies battle for tie-up with SM Entertainment

February 14, 2023 - 12:37 PM
Members of K-pop boy band BTS pose for photographs during a news conference promoting their new album "BE(Deluxe Edition)" in Seoul, South Korea, November 20, 2020. (Reuters/Heo Ran/File Photo)

K-pop agencies HYBE 352820.KS and Kakao 035720.KS, battling each other to tie up with rival SM Entertainment 041510.KQ, are facing the new challenge of a possible review by the South Korean competition regulator should either succeed.

Kakao’s agreement this month to acquire SM shares as a step towards forming a partnership with the target company is also being opposed in a court action that could improve the chances of HYBE reinforcing its dominance of the K-pop market.

HYBE has already agreed to buy 14.8% of SM’s shares from SM founder Lee Soo-man and is offering to buy a further 25% of the company from other shareholders.

READ: BTS agency HYBE seeks to take over K-pop rival SM Entertainment

Regulators are watching, however.

“When a merger and acquisition takes place, we look at various businesses under these corporations, including management, record sales, streaming, tours and merchandise,” Im Kyeong-hwan, the head of the international mergers and acquisitions division at the Korea Fair Trade Commission, told Reuters. “We look at whether they could gain market dominance to make sweeping changes in the prices and quality of their services in the market.”

“Though there have been acquisition deals involving small and medium-sized entertainment agencies, a deal on this scale is a first for us,” the official added.

HYBE, manager of boy band BTS, accounted for 51.8% of K-pop record sales in January, according to Hyundai Motors Securities.

Kakao, having agreed with SM to acquire a 9.05% state in the company, says it wants not control but a partnership, exploiting synergies that it says have been identified in long-term discussions. But Lee is seeking a court injunction to stop the transaction, an issue of new shares to Kakao, his lawyers said last week.

Shares of SM Entertainment gained 1.13% on Monday, while HYBE’s fell 3.23% and Kakao’s 4.88%. SM’s market capitalization is 2.76 trillion won ($2.16 billion).

Analysts said that even if Kakao could acquire 9.05% of SM shares, it would ultimately be overwhelmed by the nearly 40% stake that HYBE is trying to build.

“HYBE is betting nearly all of its floating funds of 1 trillion to 1.4 trillion won …. I think it’s a decisive move to secure SM, so Kakao has to think hard before it decides to spend more money,” said Jina Ahn, analyst at eBest Investment & Securities.

Jina Ahn, analyst at eBest Investment & Securities, said: “Such a large K-Pop agency coming to market is unheard of. With this acquisition, HYBE will take 60% to 65% of the K-Pop industry.”

($1 = 1,276.8000 won)

—Reporting by Hyunsu Yim and Joyce Lee; Editing by Bradley Perrett