Last month, the investment banking industry broke the news that two of the biggest media companies in South Korea are engaged in competition to acquire a stake in SM Entertainment. According to the reports, Naver Corporation and Kakao Entertainment both have plans to buy out some or all of the shares owned by SM Entertainment’s founder, Lee Soo Man. But what does it all mean? Here’s a simple breakdown of why Naver and Kakao Entertainment want a stake in SM Entertainment and what will happen if they get it.
Who are Naver and Kakao Entertainment?
As Lee Soo Man looks to sell his shares, Naver and Kakao Entertainment are the two major players competing for the SM Entertainment stake.
Naver is the corporation behind web drama production company Naver TV, mobile communications company LINE, photo filter app SNOW, a many more services K-Pop fans are familiar with. Over the past few years, Naver has also partnered heavily with K-Pop agencies, including:
- HYBE – Naver invested ₩355 billion KRW (about $319 million USD) into Weverse Company (formerly beNX) in January 2021, with HYBE acquiring V LIVE in the process.
- YG Entertainment – Naver invested ₩100 million KRW (about $90,000 USD) into YG Entertainment in 2017 and is currently the second-largest shareholder with a 9.14% stake.
- JYP Entertainment – JYP Entertainment invested ₩5.00 billion KRW (about $4.50 million USD) into NAVER Z (ZEPETO‘s parent company) last year, with YG Entertainment and HYBE also investing.
Kakao, meanwhile, is the owner of instant messenger KakaoTalk, music streaming service Melon, and several other subsidiaries in entertainment, finance, transport, gaming, and more. On the K-Pop front, subsidiary Kakao Entertainment owns:
- Play M Entertainment (home to Apink, VICTON, and Weeekly)
- EDAM Entertainment (home to IU)
- ker Entertainment (home to THE BOYZ)
- A 70% majority stake in Starship Entertainment (home to MONSTA X, WJSN, CRAVITY)
Why do Naver and Kakao Entertainment want SM Entertainment?
Naver and Kakao Entertainment are currently competing in several spheres, including shopping, financial tech, and content. However, with fintech hampered by government regulations and shopping requiring a logistics network, content is currently the best market for both companies to expand into globally. By acquiring a stake in SM Entertainment, Naver and Kakao Entertainment stand to grow their content exponentially.
Just as HYBE’s CEO Bang Si Hyuk recently talked about expanding their growth through IP (intellectual property) like TinyTAN and BT21, Naver and Kakao Entertainment need to secure major IPs (in this case, SM Entertainment artists) to quickly enhance their content growth. Owning the artists’ IP gives Naver and Kakao the opportunity to create licensed content (from games to books to merchandise) that already has a passionate consumer base ready and eager to buy.
On top of this, Kakao Entertainment currently controls about 5% of the South Korean entertainment market. With SM Entertainment under its belt, that hold jumps to almost 25%. This would put Kakao Entertainment in second place behind HYBE, which has a 33% market share. Kakao Entertainment itself is also set to debut on the stock market 2022, and a stake in SM Entertainment would greatly bolster their initial position.
Plus, Kakao Entertainment would gain SM Entertainment’s DEAR U platform, which JYP Entertainment recently acquired a 23.3% stake in. DEAR U is aiming to debut on the stock market later this year, and Kakao recently announced it would be collaborating with UNIVERSE creator NCsoft. AI-powered K-Pop community UNIVERSE already hosts artists like (G)I-DLE, MONSTA X, THE BOYZ, ATEEZ, and WJSN. The combined power of DEAR U and UNIVERSE’s artists and offerings would present a huge force for Naver and HYBE’s Weverse to contend with.
Naturally, this means it’s also in Naver’s interest to attempt the acquisition of SM Entertainment’s controlling interest before Kakao Entertainment does. Plus, Naver is already a leading player in the metaverse space with ZEPETO. Just as with DEAR U and UNIVERSE, a merging of ZEPETO and Naver Z with SM Entertainment’s plans for aespa and the SM Culture Universe presents a very desirable partnership.
So, what happens if Naver or Kakao do acquire SM shares?
Kakao Entertainment and Naver will be competing for a maximum stake of 18.73% in SM Entertainment. If either company was to acquire all of these shares, they would become SM Entertainment’s controlling shareholder.
Controlling shareholders have significant influence, leverage, and power; they can push for seats on the board, overturn votes, and generally take ownership of operations and decisions. As such, either Naver or Kakao Entertainment could essentially become the main decision-maker at SM Entertainment.
Who’s more likely to “win” the shares?
As of right now, there are obstacles for both Kakao Entertainment and Naver that make it unclear which company is likely to end up buying Lee Soo Man’s shares, if any.
For example, Kakao Entertainment and Lee Soo Man reportedly disagree on the value of SM Entertainment. Kakao Entertainment is said to have offered Lee ₩40,000 KRW (about $36.00 USD) per share—a possible total of ₩176 billion KRW (about $158 million USD) for the entire 18.73% stake. However, industry officials say Lee Soo Man rejected this deal. Over the past month, SM Entertainment shares have traded at an average of ₩39,300 KRW (about $35.40 USD) won each, peaking at ₩47,400 KRW (about $42.60 USD).
On top of this, it’s said that Lee Soo Man has proposed continuing involvement with SM Entertainment through his private album production company, Like Planning, even after selling his stocks. In 2018, it was rumored that Lee Soo Man embezzled ₩10.0 billion KRW (about $9.00 million USD) from SM Entertainment through Like Planning. This kind of outflow of funds has caused problems for investors in the past and could muddy the waters when it comes to Kakao Entertainment joining the stock market.
Kakao Entertainment is also reportedly concerned about Naver’s close involvement with SM Entertainment (from Beyond LIVE to Naver’s 30% stake in SM Entertainment Japan).
On Naver’s side, investment bankers say there’s currently bad blood between the two companies. Last year, Naver was set to integrate its V LIVE Fanship service with SM Entertainment’s own artist fanclubs powered by DEAR U’s LYSN. However, after Naver decided to transfer ownership of V LIVE to HYBE, this promise fell through.
Is this good or bad for SM Entertainment?
Given the power a company’s controlling shareholder wields, the possibility of another company owning 18.73% of SM Entertainment may sound daunting to fans. However, at this point, there’s nothing to suggest that Naver or Kakao Entertainment acquiring Lee Soo Man’s shares would present a problem for the company and its artists.
After all, both corporations are hugely successful in their own right. Kakao Entertainment has plenty of experience owning music agencies as well as developing mobile applications like those associated with DEAR U and aespa. Naver, meanwhile, has partnerships with the rest of the “Big 4” companies and has worked with SM Entertainment before. Last year, SM Entertainment and Naver established the Beyond LIVE concert series together, with JYP Entertainment later joining them.
Alongside bringing business acumen to the table, Kakao and Naver could also give SM Entertainment artists closer proximity to promotional platforms like Naver TV, Melon, and more. Ultimately, Kakao Entertainment and Naver are likely to act in their own financial interests, which means growing SM Entertainment is likely to be a priority.
Why is Lee Soo Man selling his shares in the first place?
For more about why Lee Soo Man is selling his stake in SM Entertainment as well as more on how Kakao and Naver could impact the company’s structure, read on.