Shares of SM Entertainment Co. surged to the highest on record after the K-pop agency’s founder and largest shareholder vowed to block a sale of new shares to internet giant Kakao Corp.
(Bloomberg) — Shares of SM Entertainment Co. surged to the highest on record after the K-pop agency’s founder and largest shareholder vowed to block a sale of new shares to internet giant Kakao Corp.
SM Entertainment, which manages hit groups Girls’ Generation and Super Junior, jumped as much as 11% to touch an all-time high since its 2000 listing, before paring gains to about 4% as of early afternoon in Seoul Wednesday.
The jump comes after founder Lee Soo-Man, who no longer holds official positions at the company, said he would take legal action to block the board’s decision to sell new shares and convertible bonds to Kakao. The deal would make the owner of Korea’s most popular messaging and social media service the second-biggest shareholder in SM Entertainment.
Lee remained quiet when a local activist fund launched a campaign in the fall, seeking to boost shareholder return. But he broke his silence just hours after the Kakao deal was announced Tuesday.
Lee, who is widely regarded as the godfather of K-pop, called the agreement “unlawful,” saying that SM Entertainment has no need to raise funds as it already has enough cash. The move would worsen management’s dispute with activist fund Align Partners Capital Management, by affecting management rights and corporate governance, he said.
Lee lost his title as the agency’s chief producer in December, after the company terminated its contract with boutique firm Like Production, which is wholly-owned by Lee.
“The rights offering and the CB issue have all the hallmarks of an intermediate deal prior to an eventual takeover of SM Entertainment by the Kakao Group,” Douglas Kim, an analyst who publishes on Smartkarma, said in a note.
SM Entertainment’s board of directors “may have the upper hand in pushing forward with the rights offering and CB deals. This gets interesting since this could lead to an even bigger M&A deal,” Kim said.
Founder Lee’s stake would be reduced to 16.8% of outstanding shares, down from 18.5%, after the rights offering and if the convertible bonds are converted into equity, according to Kim.
Lee’s goal is to sell his stake to investors who would guarantee the maximum management premium, KB Securities Co. analyst Lee Sun-Hwa said in a note. But it would become difficult for him to seek a high premium if the court rejects his bid and Kakao becomes the second largest shareholder, she added.
“Although the chief producer contract with Lee has ended, we would like to express our sincere gratitude to Lee, who will continue to support our company as a shareholder,” SM Entertainment said separately on Friday.
–With assistance from John Cheng.
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