Kakao to emerge as second largest shareholder in SM Entertainment

[Courtesy of SM Entertainment]

SEOUL -- South Korea's internet giant Kakao Corp. is expected to become the second largest shareholder in SM Entertainment, a domestic entertainment powerhouse, by purchasing a 9.05 percent stake in the agency, to secure a foothold in the music and content market. Lee Soo-man, the founder of SM credited with pioneering K-pop, heralded a legal battle against SM's executive boards for issuing new shares to sell them to Kakao.

Kakao said in a statement on February 7 that the company will acquire 1.23 million new shares issued by SM in the form of a paid-in capital increase assigned to a third party, which will provide 1,14 million shares to the tech giant through the acquisition of convertible bonds. The total acquisition amount will be about 217.2 billion won ($172.3 million). Kakao Entertainment, the content and entertainment wing of Kakao Corp., will be also involved in the partnership to nurture new artists targeting the global market.

Lee Soo-man, SM's largest shareholder with about 18 percent stake, is seeking to sue SM for allowing Kakao's acquisition. The 70-year-old argued through his legal representative Yoon & Yang that issuing new stocks or convertible bonds to a third party to change the ownership structure is illegal.

Lee played a key role in turning South Korea's music industry from folk songs and rock music to dance choreography performances based on hip-hop and R&B music in the early 1990s. Lee then turned his head to overseas markets and spearheaded the expansion of K-pop by nurturing artists such as TVXQ!, Super Junior, and Girls' Generation.

SM earlier announced that the company will launch a multi-level governance system instead of only relying on its founder through a project called "SM 3.0." The agency, which had dominated the domestic entertainment market, is ranked third with a market capitalization of 2.1 trillion won. Hybe, the agency of BTS, is currently the top K-pop agency with 7.8 trillion won, followed by JYP Entertainment with 2.5 trillion won.