Korean regulators approve Kakao’s takeover of SM Entertainment, amid ongoing stock price manipulation probe

Credit: Press
SM Entertainment's girl group aespa.

The often heated battle between music giant HYBE and Korean conglomerate Kakao for control of K-pop agency SM Entertainment – in which Kakao emerged victorious – was one of the most vivid music business stories of 2023.

Now, South Korean regulators have given a conditional green light to Kakao’s takeover, amid an ongoing investigation into alleged stock price manipulation by at least one Kakao executive, which may have impacted the outcome of that corporate battle.

The Korean Fair Trade Commission (KFTC) has approved Kakao’s ownership of SM Entertainment, but imposed several conditions on the buyout, including that Kakao’s music streaming service, Melon, be required to distribute music from labels and distributors that compete with SM Entertainment.

“In order to resolve concerns about restrictions on competition in the digital music market, the Fair Trade Commission firstly prohibited Melon’s competing music platform from refusing to supply music or suspending or delaying the supply of music without justifiable reasons when a competing music platform requests Kakao to supply music,” the KFTC said in a statement issued Thursday (May 2).

The KFTC also ordered the establishment of an “independent inspection body” to monitor Melon for anti-competitive practices.

The regulator said this was the first time that a “corrective action” of this sort was taken to prevent preferential treatment by a digital platform, and the first time that such action was taken in the entertainment industry.

Melon is South Korea’s most popular music streaming service, with 28 million users, and according to the KFTC, it holds a 43.6% share of the music streaming market.

SM Entertainment is generally considered to be the second-largest K-pop company, behind only HYBE. Among its more popular acts are aespa, EXO, Girls Generation, Red Velvet, and Super Junior.

The KFTC said it had determined that a tie-up between Kakao and SM could result in “substantially restricted competition.”

Kakao will be required to abide by the KFTC’s conditions for three years, but can apply to the regulator to have the conditions changed or cancelled if there is a “significant change in market conditions.”

After a months-long corporate battle with HYBE, Kakao won effective control of SM Entertainment in March 2023, taking a 39.9% stake in the publicly traded company.

However, that proved not to be the end of the story. Allegations soon emerged of potential stock price manipulation by Kakao during the fight for control, which resulted in South Korean regulators raiding SM’s offices in April, 2023.

Six months later, Kakao’s Chief Investment Officer, Bae Jae-hyun, was arrested, and prosecutors in Seoul indicted him on violations of the Capital Market Act.

Prosecutors said Bae had attempted to manipulate SM’s stock price in order to prevent HYBE from taking control of the company, spending the equivalent of $181 million on a series of high-priced stock acquisitions, in an effort to drive up SM’s stock price.

SM’s shares soared to record highs, and HYBE backed out of its bidding war for the company, Bloomberg reported.

A lawyer for Kakao asserted last fall that the company’s acquisition of SM was nonetheless legitimate, and no damage had been done by shareholders of HYBE or SM.

The investigation has since focused on what role, if any, Kakao founder Kim Beom-su played in the alleged manipulation.

According to a report in the Korea Times, prosecutors said last month that it would be “necessary” to question Kim in the investigation, but didn’t offer any information on when that might happen.Music Business Worldwide

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