K-Pop Godfather Spurs Rally in Battle for Music Empire

(Bloomberg) -- SM Entertainment Co.’s stock price surged to a record high after the K-pop agency’s founder vowed to block a share sale to internet giant Kakao Corp.

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The move has spurred speculation that the agency’s board and its allies will face off with founder Lee Soo-Man — widely regarded as the godfather of K-pop — in a race to buy up shares to secure a controlling stake.

SM Entertainment, which manages hit groups Girls’ Generation and Super Junior, jumped 9.5% to its highest close since its listing in Seoul in 2000. The stock price is up 29% since the beginning of the year. Kakao closed 1.6% higher Wednesday.

Lee, who is also SM Entertainment’s largest shareholder, said he would take legal action to block the board’s decision to sell new shares and convertible bonds to Kakao. On Wednesday, he formally filed an injunction with a Seoul court.

The 217 billion won ($172 million) deal with Kakao, announced Tuesday, would make the operator of Korea’s most popular messaging and social media service the second-biggest shareholder in SM Entertainment, while diluting Lee’s control over the company.

The deal with Kakao could reduce Lee’s stake to 16.8% of outstanding shares, down from 18.5%, according to Douglas Kim, an analyst who publishes on SmartKarma. He added that the move has “all the hallmarks of an intermediate deal prior to an eventual takeover of SM Entertainment by the Kakao Group.”

Korea’s first publicly-listed K-pop agency has been implementing proposals from local activist fund Align Partners Capital Management, which launched a campaign about a year ago, demanding better corporate governance and a boost to shareholder returns.

SM Entertainment has since agreed to appoint Align Partners Chief Executive Officer Lee Changhwan to its board. It also removed founder Lee from his role as the agency’s chief producer, after the company terminated its contract with his wholly-owned boutique firm Like Production in December.

“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 last week.

Lee broke his silence on Tuesday, calling the deal with Kakao “unlawful.” SM Entertainment has no need to raise funds as it already has enough cash, he said.

SM Entertainment and its allies including Align Partners and Kakao will now likely race against founder Lee for a bigger stake in the K-pop agency, said Kim Hajeong, an analyst at Daol Investment & Securities Co. Neither has secured a controlling stake.

SM Entertainment’s board “may have the upper hand,” SmartKarma’s Kim said. “This gets interesting since this could lead to an even bigger M&A deal.”

--With assistance from John Cheng.

(Updates with founder’s filing of a court injunction in the fourth paragraph)

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