K-pop pioneer SM shares plummet after Hybe ends takeover battle

2023.03.14 13:41:01 | 2023.03.14 13:49:06

SM Entertainment building in Seongsu-dong, Seoul [Photo by Kim Ho-young]이미지 확대

SM Entertainment building in Seongsu-dong, Seoul [Photo by Kim Ho-young]

SM Entertainment Co. shares plunged on Monday, the first day of trading since Hybe Co. dropped its plan to take control of South Korea’s K-pop pioneer, ending weeks-long takeover battle against social media giant Kakao Corp.

SM shares closed at 113,100 won on Monday, down 34,700 won or 23.48 percent from the previous session, falling back to the level before the battle over the management rights of SM. Compared with the intra-day high of 161,200 won recorded on March 8, the stock dropped nearly 30 percent. In contrast, Hybe shares closed at 189,600 won, up 3.21 percent, while Kakao gained 4.65 percent to end at 60,800 won.

On the same day, there was a flood of sell orders for SM stock futures, which fell 29.95 percent, raising speculation that the futures were sold for hedging purposes.

Kakao is conducting a tender offer to buy SM shares for 150,000 won per share until March 26, with a goal of securing 35 percent of the company. If the number of tender offer applications is high, Kakao will be able to buy from the applicants, dividing their shareholding by the number of applicants. As the management dispute has ended, it is generally observed that it is difficult for SM shares to exceed 150,000 won again. This means that a significant number of shareholders can participate in the tender offer.

For investors who hold SM shares, the calculation becomes complicated because they must decide whether to sell at a reasonable price in the market or consider the possibility of participating in the tender offer.

Another variable is the high likelihood of a further drop in SM shares after Kakao’s tender offer comes to an end.

Hybe, which owns 15.78 percent of SM shares, is also a variable. If it holds more than 15 percent of the outstanding shares, the company becomes subject to a business merger review. Even if Hybe decides to maintain its stake, there is a possibility that it may sell some shares.

In addition to the concentration of short-term buys for SM, there is uncertainty about whether SM can achieve rapid growth and therefore SM shares will experience high volatility in the short term, said Kim Ha-jung, an analyst at DAOL Investment & Securities Co.

From Kakao’s perspective, it is attractive even if only considering the management premium, but it can also aim for global expansion through SM ownership, the analyst added.

The medium to long-term effects will depend on the eventual retention of the SM stake currently held by Hybe, and if Hybe retains its 15.78 percent stake and remains the second largest shareholder in SM, this is positive to Hybe as it will be able to influence SM’s decision-making going forward, said Kim Hyun-yong, an analyst at Hyundai Motor Securities Co.

By Park Yoon-yea and Minu Kim

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